VIX Derivatives Valuation and Estimation Based on Closed-Form Series Expansions
26 Pages Posted: 2 Oct 2017 Last revised: 21 Apr 2018
Date Written: September 26, 2017
A new valuation and calibration method for VIX futures and VIX options is proposed. The method is based on a closed-form Hermite series expansion for a stochastic volatility model with the stochastic variance process driven by an affine drift term. We implement the methodology for the Heston and the mean-reverting CEV stochastic volatility models. A calibration exercise to real market data shows that the method is efficient, accurate, and suitable for practical implementation.
Keywords: VIX derivatives, Hermite series, Stochastic volatility, Heston model, Mean-reverting CEV model
JEL Classification: G13, C3
Suggested Citation: Suggested Citation