Analytical Pricing Formulas for Hybrid Variance Swaps with Regime-Switching.

The problem of pricing discretely-sampled variance swaps under stochastic volatility, stochastic interest rate and regimeswitching is being considered in this paper. An extension of the Heston stochastic volatility model structure is done by adding the Cox-Ingersoll-Ross (CIR) stochastic interest rate model. In addition, the parameters of the model are permitted to have transitions following a Markov chain process which is continuous and discoverable. This hybrid model can be used to illustrate certain macroeconomic conditions, for example the changing phases of business stages. The outcome of our regime-switching hybrid model is presented in terms of analytical pricing formulas for variance swaps. [ABSTRACT FROM AUTHOR]