The Market for Volatility Trading; Vix Futures

30 Pages Posted: 3 Nov 2008

See all articles by Menachem Brenner

Menachem Brenner

New York University (NYU) - Department of Finance

Jinghong Shu

affiliation not provided to SSRN

Jin E. Zhang

University of Otago, Otago Business School, Department of Accountancy and Finance

Date Written: May 2007

Abstract

This paper analyses the new market for trading volatility; VIX futures. We first use market data to establish the relationship between VIX futures prices and the index itself. We observe that VIX futures and VIX are highly correlated; the term structure of VIX futures price is upward sloping while the term structure of VIX futures volatility is downward sloping. To establish a theoretical relationship between VIX futures and VIX, we model the instantaneous variance using a simple square root mean-reverting process. Using daily calibrated variance parameters and VIX, the model gives good predictions of VIX futures prices. These parameter estimates could be used to price VIX options.

Suggested Citation

Brenner, Menachem and Shu, Jinghong and Zhang, Jin E., The Market for Volatility Trading; Vix Futures (May 2007). NYU Working Paper No. FIN-07-003. Available at SSRN: https://ssrn.com/abstract=1293137

Menachem Brenner (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0323 (Phone)
212-995-4233 (Fax)

Jinghong Shu

affiliation not provided to SSRN

No Address Available

Jin E. Zhang

University of Otago, Otago Business School, Department of Accountancy and Finance ( email )

Dunedin, 9054
New Zealand
64 3 479 8575 (Phone)
64 3 479 8171 (Fax)

HOME PAGE: http://sites.google.com/site/jinzhanghomepage/home

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