Variance Term Structure and VIX Futures Pricing

24 Pages Posted: 25 Apr 2005  

Yingzi Zhu

Tsinghua University - School of Economics & Management

Jin E. Zhang

University of Otago, Otago Business School, Department of Accountancy and Finance

Date Written: March 2005

Abstract

Using no arbitrage principle, we derive a relationship between the drift term of risk-neutral dynamics for instantaneous variance and the term structure of forward variance curve. We show that the forward variance curve can be derived from options market. Based on the variance term structure, we derive a no arbitrage pricing model for VIX futures pricing. The model is the first no arbitrage model combining options market and VIX futures market. The model can be easily generalized to price other volatility derivatives.

Keywords: Stochastic volatility, variance term structure, arbitrage-free model, volatility derivatives, VIX futures

JEL Classification: G13

Suggested Citation

Zhu, Yingzi and Zhang, Jin E., Variance Term Structure and VIX Futures Pricing (March 2005). Available at SSRN: https://ssrn.com/abstract=705802 or http://dx.doi.org/10.2139/ssrn.705802

Yingzi Zhu (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

Jin E. Zhang

University of Otago, Otago Business School, Department of Accountancy and Finance ( email )

Dunedin, 9054
New Zealand
64 3 479 8575 (Phone)
64 3 479 8171 (Fax)

HOME PAGE: http://sites.google.com/site/jinzhanghomepage/home

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