Construction of Volatility Indices Using a Multinomial Tree Approximation Method
HANDBOOK OF MODELING HIGH-FREQUENCY DATA IN FINANCE, Frederi G. Viens, Maria C. Mariani and Ionut Florescu, eds., December 2011
24 Pages Posted: 4 Mar 2012
Date Written: February 16, 2011
This paper introduces a new methodology for an alternative calculation of market volatility index based on a multinomial tree approximation of a stochastic volatility model. The estimation is performed by constructing synthetic options with consistent properties. Several variants of this index are calculated and their performance is analyzed over the whole dataset and over a subset of data corresponding to particular market events. The proposed index is compared with the VIX produced by CBOE.
Keywords: volatility, multinomial tree
JEL Classification: C63
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