Valuation of Vix Derivatives
59 Pages Posted: 20 Dec 2009 Last revised: 11 Sep 2012
There are 3 versions of this paper
Valuation of Vix Derivatives
Valuation of VIX Derivatives
Valuation of Vix Derivatives
Date Written: July 22, 2012
Abstract
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.
Keywords: Central Tendency, Stochastic Volatility, Jumps, Term Structure, Volatility Skews
JEL Classification: G13
Suggested Citation: Suggested Citation
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