7th Oxford-Princeton Workshop
on Financial Mathematics & Stochastic Analysis
April 27-28, 2012, Princeton University
Variance Swaps on Lévy Subordinated
Diffusion Processes
Matthew Lorig Princeton University Abstract We introduce a class of models in which an underlying is described by a diffusion that is time‐changed by a Levy subordinator. As the subordinator contains jumps, the underlying experiences jumps as well. We show how the drift and Levy measure of the subordinator can be obtained from liquid call and put prices. And we derive an expression for the fair value of a variance swap. This is a joint work with Rafael Mendoza‐Arriaga.