Pricing variance swaps in a hybrid model of stochastic volatility and   interest rate with regime-switching
  In this paper, we consider the problem of pricing discretely-sampled variance swaps based on a hybrid model of stochastic volatility and stochastic interest rate with regime-switching. Our modelling framework extends the Heston stochastic volatility model by including the CIR stochastic interest rate and model parameters that switch according to a continuous-time observable Markov chain process. A semi-closed form pricing formula for variance swaps is derived. The pricing formula is assessed through numerical implementations, and the impact of including regime-switching on pricing variance swaps is also discussed. 
Jiling Cao, Teh Raihana Nazirah Roslan and Wenjun Zhang
q-fin.MF q-fin.PR