New Study Findings from University of Calgary Illuminate Research in Risk Management (Pricing of Averaged Variance, Volatility, Covariance and Correlation Swaps with Semi-Markov Volatilities): Insurance – Risk Management

2023 OCT 03 (NewsRx) -- By a News Reporter-Staff News Editor at Insurance Daily News -- New research on risk management is the subject of a new report. According to news originating from Calgary, Canada, by NewsRx editors, the research stated, “In this paper, we consider the problem of pricing variance, volatility, covariance and correlation swaps for financial markets with semi-Markov volatilities.”

Our news reporters obtained a quote from the research from University of Calgary: “The paper’s motivation derives from the fact that in many financial markets, the inter-arrival times between book events are not independent or exponentially distributed but instead have an arbitrary distribution, which means they can be accurately modelled using a semi-Markov process. Through the results of the paper, we hope to answer the following question: Is it possible to calculate averaged swap prices for financial markets with semi-Markov volatilities? This question has not been considered in the existing literature, which makes the paper’s results novel and significant, especially when one considers the increasing popularity of derivative securities such as swaps, futures and options written on the volatility index VIX. Within this paper, we model financial markets featuring semi-Markov volatilities and price-averaged variance, volatility, covariance and correlation swaps for these markets. Formulas used for the numerical evaluation of averaged variance, volatility, covariance and correlation swaps with semi-Markov volatilities are presented as well. The formulas that are detailed within the paper are innovative because they provide a new, simplified method to price averaged swaps, which has not been presented in the existing literature.”

According to the news editors, the research concluded: “A numerical example involving the pricing of averaged variance, volatility, covariance and correlation swaps in a market with a two-state semi-Markov process is presented, providing a detailed overview of how the model developed in the paper can be used with real-life data. The novelty of the paper lies in the closed-form formulas provided for the pricing of variance, volatility, covariance and correlation swaps with semi-Markov volatilities, as they can be directly applied by derivative practitioners and others in the financial industry to price variance, volatility, covariance and correlation swaps.”

For more information on this research see: Pricing of Averaged Variance, Volatility, Covariance and Correlation Swaps with Semi-Markov Volatilities. Risks, 2023,11(9). (Risks - http://www.mdpi.com/journal/risks). The publisher for Risks is MDPI AG.

A free version of this journal article is available at https://doi.org/10.3390/risks11090162.

Our news journalists report that more information may be obtained by contacting Anatoliy Swishchuk, Department of Mathematics and Statistics, University of Calgary, Calgary, AB T2N 1N4, Canada. Additional authors for this research include Sebastian Franco.

ORCID is an identifier for authors and includes bibliographic information. The following is ORCID information for the authors of this research: Anatoliy Swishchuk (http://orcid.org/0000-0002-4822-9934), Sebastian Franco (http://orcid.org/0009-0001-8909-3455).

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