|
Abstract
|
|---|
Define the realized variance of a price process S to be the quadratic variation of log(S) from time 0 to time T. (In practice, Wall Street dealers in variance contracts typically use the sample variance of the daily or weekly returns of S.) By trading S and European options on S, we replicate derivative contracts which pay out general functions of realized variance, such as its square root, realized volatility. Unlike previous efforts to hedge general volatility derivatives, we avoid imposing any specific volatility model on the S diffusion. We do initially assume a correlation condition and continuity of price paths, but then we remove or relax both assumptions. This work is joint with Peter Carr. |
|
|