Extreme-Strike Comparisons and Structural Bounds for SPX and VIX Options

SIAM Journal on Financial Mathematics (2018) Vol. 9, No, 3, pp. 401-434

34 Pages Posted: 30 Nov 2014 Last revised: 2 May 2018

See all articles by Andrew Papanicolaou

Andrew Papanicolaou

NYU Tandon School of Engineering, Department of Finance and Risk Engineering

Date Written: January 8, 2017

Abstract

This article explores the relationship between the SPX and VIX options markets. High-strike VIX call options are used to hedge tail risk in the SPX, which means that SPX options are a reflection of the extreme-strike asymptotics of VIX options, and vice versa. This relationship can be quantified using moment formulas in a model-free way. Comparisons are made between VIX and SPX implied volatilities along with various examples of stochastic volatility models.

Keywords: VIX options, moment formula, stochastic volatility

Suggested Citation

Papanicolaou, Andrew, Extreme-Strike Comparisons and Structural Bounds for SPX and VIX Options (January 8, 2017). SIAM Journal on Financial Mathematics (2018) Vol. 9, No, 3, pp. 401-434. Available at SSRN: https://ssrn.com/abstract=2532020 or http://dx.doi.org/10.2139/ssrn.2532020

Andrew Papanicolaou (Contact Author)

NYU Tandon School of Engineering, Department of Finance and Risk Engineering ( email )

6 Metrotech Center
Brooklyn, NY 11201
United States

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