Journal of Computational Finance

Risk.net

Valuation of options on discretely sampled variance: a general analytic approximation

Gabriel Drimus, Walter Farkas and Elise Gourier

ABSTRACT

The values of options on realized variance are significantly impacted by the discrete sampling of realized variance and may be substantially higher than the values of options on continuously sampled variance. Under general stochastic volatility dynamics, we analyze the discretization effect and obtain an analytical correction term to be applied to the value of options on continuously sampled variance. The result allows for a straightforward implementation in many of the standard stochastic volatility models proposed in the literature. Finally, we compare the performance of different numerical methods for pricing options on discretely sampled variance and give recommendations based on the option's characteristics.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here