The Variance Process Implied in VIX Options: Affine vs. Non-Affine Models

41 Pages Posted: 17 Nov 2017

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Alexander Kraftschik

University of Muenster - Finance Center Muenster

Clemens Völkert

University of Muenster - Finance Center Muenster

Date Written: March 27, 2017

Abstract

We use the informational content of VIX derivatives to infer implications on the non-affine modeling of the stock returns' variance dynamics. We find that both a non-affine diffusion and variance jumps are necessary to capture the short- and long-term implied volatility distribution. In- and out-of-sample, a linear CEV jump-diffusion model leads to valuation errors that are negligibly affected by the VIX options' maturity and moneyness. For this setup, we obtain parameter estimates that are comparable to the stock option pricing literature. Compared to a linear specification, we find that estimating the diffusion exponent freely does not lead to significantly better results.

Keywords: Jump-diffusion model, volatility derivatives, VIX options, non-affine diffusion

JEL Classification: G13, C58

Suggested Citation

Branger, Nicole and Kraftschik, Alexander and Völkert, Clemens, The Variance Process Implied in VIX Options: Affine vs. Non-Affine Models (March 27, 2017). Available at SSRN: https://ssrn.com/abstract=3071762 or http://dx.doi.org/10.2139/ssrn.3071762

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Alexander Kraftschik (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=3737

Clemens Völkert

University of Muenster - Finance Center Muenster ( email )

Universitätsstr. 14-16
Münster, 48143
Germany

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