Abstract

http://ssrn.com/abstract=1788252
 
 

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Price and Volatility Dynamics Implied by the VIX Term Structure


Jin-Chuan Duan


National University of Singapore (NUS) - Business School and Risk Management Institute

Chung-Ying Yeh


National Chung Hsing University

June 7, 2011


Abstract:     
A particle- lter based estimation method is developed for the stochastic volatility model with/without jumps and applied on the S&P 500 index value and the VIX term structure jointly. The model encompasses all mean-reverting stochastic volatility option pricing models with a constant elasticity of variance, and can allow for price jumps. Our contention is that using the VIX term structure in estimation can help us reach a more reliable conclusion in terms of the nature of the risk-neutral volatility dynamic. Our empirical ndings are: (1) the volatility process under the risk-neutral measure is mean-reverting; (2) the jump intensity is time-varying; (3) the jump and volatility risks are priced; (4) the measurement errors in VIXs are material; and (5) the square-root volatility process is grossly mis-speci ed with or without price jumps.

Number of Pages in PDF File: 40

Keywords: Model-free volatility, stochastic volatility, jumps, options, VIX term structure, Constant elasticity of variance

JEL Classification: G12, G13

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Date posted: March 20, 2011 ; Last revised: March 16, 2012

Suggested Citation

Duan, Jin-Chuan and Yeh, Chung-Ying, Price and Volatility Dynamics Implied by the VIX Term Structure (June 7, 2011). Available at SSRN: http://ssrn.com/abstract=1788252 or http://dx.doi.org/10.2139/ssrn.1788252

Contact Information

Jin-Chuan Duan (Contact Author)
National University of Singapore (NUS) - Business School and Risk Management Institute ( email )
1 Business Link
Singapore, 117592
Singapore
Chung-Ying Yeh
National Chung Hsing University ( email )
402, No. 250 Kuo Kuang Road, Taiwan
Taichung, Taiwan
China
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