Valuation of VIX and Target Volatility Options with Affine GARCH Models
45 Pages Posted: 13 Aug 2020
Date Written: July 13, 2020
In this paper we propose semi-closed-form solutions, subject to an inversion of the Fourier transform, for the price of VIX options and target volatility options (TVOs) under affine GARCH models based on Gaussian and Inverse Gaussian distributions. We illustrate the advantage of the proposed analytic expressions by comparing them with those obtained from benchmark Monte-Carlo simulations. The empirical performance of the two affine GARCH models is tested using different calibration exercises based on historical returns and market quotes on VIX and SPX options.
Keywords: VIX Options, Target Volatility Options, Heston-Nandi GARCH Model, Inverse Gaussian Model, Joint Calibration
JEL Classification: G12, G13, C13
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