Valuation of VIX and target volatility options with affine GARCH models

Hongkai Cao, Alexandru Badescu, Zhenyu Cui and Sarath Kumar Jayaraman

Journal of Futures Markets, 2020, vol. 40, issue 12, 1880-1917

Abstract: In this paper we propose semiclosed‐form solutions, subject to an inversion of the Fourier transform, for the price of VIX options and target volatility options under affine GARCH models based on Gaussian and Inverse Gaussian distributions. We illustrate the advantage of the proposed analytic expressions by comparing them with those obtained from benchmark Monte–Carlo simulations. The empirical performance of the two affine GARCH models is tested using different calibration exercises based on historical returns and market quotes on VIX and SPX options.

Date: 2020
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https://doi.org/10.1002/fut.22157

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