Posted: 29 Aug 2005
VIX futures are exchange-traded contracts on a future volatility index level (VIX) derived from a basket of SPX stock index options. The paper posits a stochastic variance model of VIX time evolution, and develops an expression for VIX futures. Free parameters are estimated from market data over the past few years. It is found that the model with parameters estimated from the whole period from 1990 to 2005 overprices the futures contracts by 16-44%. But the discrepancy is dramatically reduced to 2-12% if the parameters are estimated from the most recent one-year period.
Keywords: VIX, VIX futures, square root process
JEL Classification: G13
Suggested Citation: Suggested Citation