Convex order properties of discrete realized variance and applications to variance options

Details Convex order properties of discrete realized variance and applications to variance options Convex order properties of discrete realized variance and applications to variance options

2011-03-11

arxiv.org/abs/1103.2310v1

Economy

Quantitative Finance

Pricing of Securities

17 pages

Scientific paper

We consider a square-integrable semimartingale with conditionally independent increments and symmetric jump measure, and show that its discrete realized variance dominates its quadratic variation in increasing convex order. The result has immediate applications to the pricing of options on realized variance. For a class of models including time-changed Levy models and Sato processes with symmetric jumps our results show that options on variance are typically underpriced, if quadratic variation is substituted for the discretely sampled realized variance.

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