Local volatility of volatility for the VIX market

Gabriel Drimus () and Walter Farkas ()

Review of Derivatives Research, 2013, vol. 16, issue 3, 267-293

Abstract: Following a trend of sustained and accelerated growth, the VIX futures and options market has become a closely followed, active and liquid market. The standard stochastic volatility models—which focus on the modeling of instantaneous variance—are unable to fit the entire term structure of VIX futures as well as the entire VIX options surface. In contrast, we propose to model directly the VIX index, in a mean-reverting local volatility-of-volatility model, which will provide a global fit to the VIX market. We then show how to construct the local volatility-of-volatility surface by adapting the ideas in Carr (Local variance gamma. Bloomberg Quant Research, New York, 2008 ) and Andreasen and Huge (Risk Mag 76–79, 2011 ) to a mean-reverting process. Copyright Springer Science+Business Media New York 2013

Keywords: VIX futures; VIX options; Volatility of volatility; Volatility derivatives; G12; G13 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://hdl.handle.net/10.1007/s11147-012-9086-9 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:revdev:v:16:y:2013:i:3:p:267-293

Ordering information: This journal article can be ordered from
http://www.springer. ... 29/journal/11147/PS2

DOI: 10.1007/s11147-012-9086-9

Access Statistics for this article

Review of Derivatives Research is currently edited by Gurdip Bakshi and Dilip Madan

More articles in Review of Derivatives Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().