An Empirical Comparison of Continuous-Time Models of Implied Volatility Indices

Posted: 27 Jan 2007 Last revised: 3 Jan 2008

See all articles by George Dotsis

George Dotsis

National Kapodistrian University of Athens - Faculty of Economics; Essex Finance Centre, Essex Business School, University of Essex

Dimitris Psychoyios

University of Piraeus - Department of Industrial Management

George S. Skiadopoulos

Queen Mary, University of London, School of Economics and Finance; University of Piraeus

Abstract

We explore the ability of alternative popular continuous-time diffusion and jump diffusion processes to capture the dynamics of implied volatility indices over time. The performance of the various models is assessed under both econometric and financial metrics. To this end, data are employed from major European and American implied volatility indices and the rapidly growing CBOE volatility futures market. We find that the addition of jumps is necessary to capture the evolution of implied volatility indices under both metrics. Mean reversion is of second order importance though. The results are consistent across the various metrics, markets, and construction methodologies.

Keywords: Continuous time estimation, Conditional characteristic function, Implied volatility indices, Volatility derivatives, VIX futures

JEL Classification: C13, C50, G10, G13

Suggested Citation

Dotsis, George and Psychoyios, Dimitrios and Skiadopoulos, George, An Empirical Comparison of Continuous-Time Models of Implied Volatility Indices. Journal of Banking and Finance, Vol. 31, No. 12, pp. 3584-3603, 2007, Available at SSRN: https://ssrn.com/abstract=959415

George Dotsis

National Kapodistrian University of Athens - Faculty of Economics ( email )

Greece

HOME PAGE: http://sites.google.com/site/gdotsis/

Essex Finance Centre, Essex Business School, University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Dimitrios Psychoyios

University of Piraeus - Department of Industrial Management ( email )

80, Karaoli & Dimitriou Str.
18534 Piraeus
Greece

George Skiadopoulos (Contact Author)

Queen Mary, University of London, School of Economics and Finance

Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom

University of Piraeus ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

HOME PAGE: http://web.xrh.unipi.gr/faculty/gskiadopoulos/

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