Valuation of Vix Derivatives
Bank of Spain
Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)
July 22, 2012
We conduct an extensive empirical analysis of VIX derivative valuation models before, during and after the 2008-2009 financial crisis. Since the restrictive mean reversion and heteroskedasticity features of existing models yield large distortions during the crisis, we propose generalisations with a time varying central tendency, jumps and stochastic volatility, analyse their pricing performance, and implications for term structures of VIX futures and volatility "skews". We find that a process for the log of the observed VIX combining central tendency and stochastic volatility reliably prices VIX derivatives. We also uncover a signicant risk premium that shifts the long run volatility level.
Number of Pages in PDF File: 59
Keywords: Central Tendency, Stochastic Volatility, Jumps, Term Structure, Volatility Skews
JEL Classification: G13working papers series
Date posted: December 20, 2009 ; Last revised: September 11, 2012
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