Volatility Components: Evidence from VIX Futures Market

33 Pages Posted: 23 Sep 2008

See all articles by Zhongjin Lu

Zhongjin Lu

University of Georgia - Department of Finance

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: September 2008

Abstract

In this paper we analyze CBOE VIX futures price time series data from Mar. 2004 to Feb. 2008. We derive a new pricing framework for VIX futures that is convenient to study variance term structure dynamics. Our main contribution to existing literature is the identification of the number of factors implicit in VIX futures term structure. We find that three-factor model is ideal to characterize the variance term structure. We further construct and estimate structured two- and three-factor models to identify the components and find similar results.

Keywords: VIX futures, loglinear model, Kalman filter, Principal Component Analysis (PCA), variance term structure

JEL Classification: C52, G12, G13

Suggested Citation

Lu, Zhongjin and Zhu, Yingzi, Volatility Components: Evidence from VIX Futures Market (September 2008). Available at SSRN: https://ssrn.com/abstract=1271404 or http://dx.doi.org/10.2139/ssrn.1271404

Zhongjin Lu

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6254
United States

Yingzi Zhu (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

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