Pricing CBOE VIX in non-affine GARCH models with variance risk premium

Chen Tong

Finance Research Letters, 2024, vol. 62, issue PA

Abstract: The commonly used local risk-neutral valuation relationship (LRNVR) for non-affine GARCH models only compensates for the equity risk premium. In this paper, we propose a direct approach to bridge the physical and risk-neutral measures for non-affine GARCH models, explicitly accounting for the variance risk premium. This method avoids the need to specify a particular form of pricing kernel when it is potentially complex. The closed-form CBOE VIX pricing formulas can be easily derived for several popular non-affine GARCH models, including EGARCH, GJR-GARCH, and NGARCH. Empirical results demonstrate that the newly proposed framework yields superior pricing performance for CBOE VIX.

Keywords: Generalized LRNVR; VIX pricing; Non-affine GARCH; Variance risk premium; Risk neutralization (search for similar items in EconPapers)
JEL-codes: C51 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324001454

DOI: 10.1016/j.frl.2024.105115

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