A Simplified Pricing Model for Volatility Futures
Journal of Future Markets, Volume 31, Issue 4, April 2011, Pages 307-339
39 Pages Posted: 23 May 2019
Date Written: March 26, 2011
We develop a general model to price VIX futures contracts. The model is adapted to test both the constant elasticity of variance (CEV) and the Cox–Ingersoll–Ross formulations, with and without jumps. Empirical tests on VIX futures prices provide out-of-sample estimates within 2% of the actual futures price for almost all futures maturities. We show that although jumps are present in the data, the models with jumps do not typically outperform the others; in particular, we demonstrate the important benefits of the CEV feature in pricing futures contracts. We conclude by examining errors in the model relative to the VIX characteristics.
Keywords: volatility, VIX futures
JEL Classification: G13, G14
Suggested Citation: Suggested Citation