Variance swaps pricing under the regime-switching jump-diffusion model

This paper reformulates a model for pricing continuous-sampling times variance swaps, which is the mean-reverting Gaussian model with asymmetric double exponential distribution jump. We extend it by further considering the regime-switching frame. In other words, the parameters in this model are modulated by a Markov chain. Note that the market considered is incomplete in general, which implies that more than one equivalent martingale measures exist. Utilizing differential methods such as the regime-switching Esscher transform, we identify an equivalent martingale measure called the minimal entropy martingale measure (MEMM) and derive an analytic solution for the pricing problem.