Fractional Barndorff-Nielsen and Shephard model: applications in variance and volatility swaps, and hedging
Nicholas Salmon,
Indranil SenGupta
Abstract:In this paper, we introduce and analyze the fractional Barndorff-Nielsen and Shephard (BN-S) stochastic volatility model. The proposed model is based upon two desirable properties of the long-term variance process suggested by the empirical data: long-term memory and jumps. The proposed model incorporates the long-term memory and positive autocorrelation properties of fractional Brownian motion with H > 1/2, and the jump properties of the BN-S model. We find arbitrage-free prices for variance and volatility sw… Show more
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