The Effects of Asymmetric Volatility and Jumps on the Pricing of VIX Derivatives

FEDS Working Paper No. 2015-071

http://dx.doi.org/10.17016/FEDS.2015.071

53 Pages Posted: 21 Sep 2015

See all articles by Yang-Ho Park

Yang-Ho Park

Board of Governors of the Federal Reserve System

Date Written: September 11, 2015

Abstract

This paper proposes a new collection of affine jump-diffusion models for the valuation of VIX derivatives. The models have two distinctive features. First, we allow for a positive correlation between changes in the VIX and in its stochastic volatility to accommodate asymmetric volatility. Second, upward and downward jumps in the VIX are separately modeled to accommodate the possibility that investors react differently to good and bad surprises. Using the VIX futures and options data from July 2006 through January 2013, we find conclusive evidence for the benefits of including both asymmetric volatility and upward jumps in models of VIX derivatives pricing. We do not, however, find evidence supporting downward jumps.

Keywords: VIX options, VIX futures, jump-diffusion, stochastic volatility, volatility smile

JEL Classification: G12, G13

Suggested Citation

Park, Yang-Ho, The Effects of Asymmetric Volatility and Jumps on the Pricing of VIX Derivatives (September 11, 2015). http://dx.doi.org/10.17016/FEDS.2015.071. Available at SSRN: https://ssrn.com/abstract=2662629 or http://dx.doi.org/10.2139/ssrn.2662629

Yang-Ho Park (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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