Unifying Variance Swap Term Structures, SPX and VIX Derivatives

41 Pages Posted: 20 Jan 2012 Last revised: 12 Jan 2014

See all articles by Bo Zhao

Bo Zhao

City University London - Sir John Cass Business School

Date Written: January 21, 2013

Abstract

We propose a term structure function, a two-factor variance process and a return process to jointly price SPX and VIX derivatives. The distinctive feature of the variance model is that the factor coefficients are time-varying and they are bonded with the term structure of variance swaps. The model incorporates additional characteristics that jumps in the return process and in the variance process are more recognizable in short terms, the term structure of variance swaps is versatilely rich to be able to accommodate many desired features, and the leverage effect is stochastic. In the interest of analytical tractability, the two-factor variance process and the return process are structured by affine processes.

Keywords: Term structure, Affine process, VIX derivative, SPX derivative, multi-factor model

JEL Classification: G12, C00

Suggested Citation

Zhao, Bo, Unifying Variance Swap Term Structures, SPX and VIX Derivatives (January 21, 2013). Available at SSRN: https://ssrn.com/abstract=1988602 or http://dx.doi.org/10.2139/ssrn.1988602

Bo Zhao (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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