Multi-asset Generalised Variance Swaps in Barndorff-Nielsen and Shephard model

TL;DR

This paper introduces and prices multi-asset generalized variance swaps based on the maximum eigenvalue and trace of the covariance matrix within the Barndorff-Nielsen and Shephard model, with practical implications for risk hedging.

Contribution

It develops a novel framework for pricing new types of variance swaps on multiple assets using the BNS model, extending existing methods.

Findings

Pricing formulas for these swaps are derived.

Numerical examples demonstrate practical applicability.

Results highlight usefulness for commodity risk hedging.

Abstract

This paper proposes swaps on two important new measures of generalized variance, namely the maximum eigenvalue and trace of the covariance matrix of the assets involved. We price these generalized variance swaps for Barndorff-Nielsen and Shephard model used in financial markets. We consider multiple assets in the portfolio for theoretical purpose and demonstrate our approach with numerical examples taking three stocks in the portfolio. The results obtained in this paper have important implications for the commodity sector where such swaps would be useful for hedging risk.