The term structure of the VXX option smirk: Pricing VXX option with a two‐factor model and asymmetry jumps

Xiaoyu Tan, Chengxiang Wang, Wei Lin, Jin E. Zhang, Shenghong Li, Xuejun Zhao and Zili Zhang

Journal of Futures Markets, 2021, vol. 41, issue 4, 439-457

Abstract: This paper proposes a comprehensive jump‐to‐default extended two‐factor stochastic volatility plus asymmetry jumps model for the valuation of VXX derivatives. The model provides a more flexible modeling of the time variation in VXX options smirk and VXX options volatility term structure compared with previous model alternatives. Empirical results indicate that our model outperforms Bao et al.'s model by 28.19% in‐sample and 23.38% out‐of‐sample. Moreover, our model improves the probability that the estimated prices fall inside the quoted option bid‐ask spread and has a better fitting capacity for the term structure of VXX implied volatility, especially for out‐of‐the‐money options.

Date: 2021
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