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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  

Dragos Bozdog

Stevens Institute of Technology

Ionut Florescu

Stevens Institute of Technology

Khaldoun Khashanah

Stevens Institute of Technology

Hongwei Qiu

Stevens Institute of Technology

Date Written: February 16, 2011

Abstract

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

Suggested Citation

Bozdog, Dragos and Florescu, Ionut and Khashanah, Khaldoun and Qiu, Hongwei, Construction of Volatility Indices Using a Multinomial Tree Approximation Method (February 16, 2011). HANDBOOK OF MODELING HIGH-FREQUENCY DATA IN FINANCE, Frederi G. Viens, Maria C. Mariani and Ionut Florescu, eds., December 2011 . Available at SSRN: https://ssrn.com/abstract=2013362

Dragos Bozdog (Contact Author)

Stevens Institute of Technology ( email )

Castle Point on Hudson
Hoboken, NJ 07030
United States

HOME PAGE: http://personal.stevens.edu/~dbozdog/

Ionut Florescu

Stevens Institute of Technology ( email )

Castle Point on the Hudson
Hoboken, NJ 07030
United States

Khaldoun Khashanah

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

Hongwei Qiu

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

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