VARIANCE TERM STRUCTURE AND VIX FUTURES PRICING

Yingzi Zhu () and Jin E. Zhang ()
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Yingzi Zhu: Department of International Trade and Finance, School of Economics and Management, Tsinghua University, Beijing 100084, China
Jin E. Zhang: School of Business and School of Economics and Finance, The University of Hong Kong, Pokfulam Road, Hong Kong, China

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 01, 111-127

Abstract: Using no arbitrage principle, we derive a relation between the drift term of risk-neutral dynamics for instantaneous variance and the term structure of forward variance. We show that the forward variance curve can be derived from options market. Based on the variance term structure, we derive a no arbitrage pricing model for VIX futures pricing. The model is the first no arbitrage model combining options market and VIX futures market. The model can be easily generalized to price other volatility derivatives.

Keywords: Stochastic volatility; variance term structure; arbitrage-free model; volatility derivatives; VIX futures (search for similar items in EconPapers)
Date: 2007
References: View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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DOI: 10.1142/S0219024907004123

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