VIX option pricing
ABSTRACT Substantial progress has been made in developing more realistic option pricing models for S&P 500 index (SPX) options. Empirically, however, it is not known whether and by how much each generalization of SPX price dynamics improves VIX option pricing. This article fills this gap by first deriving a VIX option model that reconciles the most general price processes of the SPX in the literature. The relative empirical performance of several models of distinct interest is examined. Our results show that state-dependent price jumps and volatility jumps are important for pricing VIX options. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:523–543, 2009
Article: VIX Futures[show abstract] [hide abstract]
ABSTRACT: VIX futures are exchange-traded contracts on a future volatility index level (VIX) derived from a basket of SPX stock index options. The paper posits a stochastic variance model of VIX time evolution, and develops an expression for VIX futures. Free parameters are estimated from market data over the past few years. It is found that the model with parameters estimated from the whole period from 1990 to 2005 overprices the futures contracts by 16-44%. But the discrepancy is dramatically reduced to 2-12% if the parameters are estimated from the most recent one-year period.08/2005;
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ABSTRACT: This paper studies the empirical performance of jump-diffusion models that allow for stochastic volatility and correlated jumps affecting both prices and volatility. The results show that the models in question provide reasonable fit to both option prices and returns data in the in-sample estimation period. This contrasts with previous findings where stochastic volatility paths are found to be too smooth relative to the option implied dynamics. While the models perform well during the high volatility estimation period, they tend to overprice long dated contracts out-of-sample. This evidence points towards a too simplistic specification of the mean dynamics of volatility.Duke University, Department of Economics, Working Papers. 01/2002;
- Econometrica. 04/2001; 48:817-830.