VIX Derivatives Valuation and Estimation Based on Closed-Form Series Expansions

26 Pages Posted: 2 Oct 2017 Last revised: 21 Apr 2018

See all articles by Zhe Zhao

Zhe Zhao

Stevens Institute of Technology

Zhenyu Cui

Stevens Institute of Technology - School of Business

Ionut Florescu

Stevens Institute of Technology

Date Written: September 26, 2017

Abstract

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

Zhao, Zhe and Cui, Zhenyu and Florescu, Ionut, VIX Derivatives Valuation and Estimation Based on Closed-Form Series Expansions (September 26, 2017). Available at SSRN: https://ssrn.com/abstract=3043402 or http://dx.doi.org/10.2139/ssrn.3043402

Zhe Zhao

Stevens Institute of Technology ( email )

1 Castle Point
Hoboken, NJ 07030
United States

Zhenyu Cui (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://sites.google.com/site/zhenyucui86/publications

Ionut Florescu

Stevens Institute of Technology ( email )

Castle Point on the Hudson
Hoboken, NJ 07030
United States

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