This paper considers the pricing of discretely-sampled variance swaps under the class of equity-interest rate hybridization. Our modeling framework consists of the equity which follows the dynamics of the Heston stochastic volatility model  and the stochastic interest rate  driven by the Cox-Ingersoll-Ross (CIR) process with full correlation structure  among the state variables. Since one limitation of hybrid models is the unavailability of analytical pricing formula  of variance swaps  due to the non-affinity property , we obtain an efficient semi-closed form pricing formula of variance swaps for an approximation of the hybrid model via the derivation of characteristic functions. We implement numerical experiments to evaluate the accuracy of our formula and confirm that the impact of the correlation between the underlying and  interest rate is significant  .
This paper considers the case of pricing discretely-sampled variance swaps under the class of equity-interest rate hybridization. Our modeling framework consists of the equity which follows the dynamics of the Heston stochastic volatility model , and the stochastic interest rate is driven by the Cox-Ingersoll-Ross (CIR) process with full correlation structure imposed among the state variables. This full correlation structure possess the limitation to have fully analytical pricing formula for hybrid models of variance swaps , due to the non-affinity property embedded in the model itself. We address this issue by obtaining an efficient semi-closed form pricing formula of variance swaps for an approximation of the hybrid model via the derivation of characteristic functions. Subsequently, we implement numerical experiments to evaluate the accuracy of our pricing formula. Our findings confirmed that the impact of the correlation between the underlying and the interest rate is significant for pricing discretely-sampled variance swaps .
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