Discover the SciOpen Platform and Achieve Your Research Goals with Ease.
Search articles, authors, keywords, DOl and etc.
This paper develops an affine pricing framework for discretely and continuously monitored variance swaps under a Heston-type stochastic volatility model with finite-activity jumps, stochastic long-run variance, and macro-liquidity feedback. The key modeling feature is that a persistent macro-liquidity state variable enters the mean-reversion target of the spot variance process, so that liquidity conditions affect future expected quadratic variation through the variance target in addition to asset-price or liquidity-discount channels. Under the risk-neutral measure, the four-factor model remains exponentially affine. We derive the joint moment-generating function, the Riccati system, the fair strike for discretely sampled actual-return variance swaps, and the continuous-monitoring limiting strike. We also establish finite-horizon transform admissibility conditions and prove that the discrete actual-return strike converges to the continuous quadratic-variation benchmark as the monitoring mesh vanishes. Numerical experiments show that the proposed model nests the relevant no-liquidity and no-jump benchmarks, that Monte Carlo estimates remain close to the affine-transform prices, and that the macro-liquidity channel raises the benchmark fair strikes by about 1.9% when liquidity stress increases the effective long-run variance target. The results provide a tractable link between stochastic long-run variance modeling, liquidity-adjusted derivative valuation, and jump-sensitive variance swap pricing.
This is an open access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0)
Comments on this article