Consistent Pricing of VIX and Equity Derivatives with the 4/2 Stochastic Volatility Plus Jumps Model

Wei Lin, Shenghong Li, Xingguo Luo and Shane Chern

Papers from arXiv.org

Abstract: In this paper, we develop a 4/2 stochastic volatility plus jumps model, namely, a new stochastic volatility model including the Heston model and 3/2 model as special cases. Our model is highly tractable by applying the Lie symmetries theory for PDEs, which means that the pricing procedure can be performed efficiently. In fact, we obtain a closed-form solution for the joint Fourier-Laplace transform so that equity and realized-variance derivatives can be priced. We also employ our model to consistently price equity and VIX derivatives. In this process, the quasi-closed-form solutions for future and option prices are derived. Furthermore, through adopting data on daily VIX future and option prices, we investigate our model along with the Heston model and 3/2 model and compare their different performance in practice. Our result illustrates that the 4/2 model with an instantaneous volatility of the form $(a\sqrt{V_t}+b/\sqrt{V_t})$ for some constants $a, b$ presents considerable advantages in pricing VIX derivatives.

Date: 2015-10, Revised 2015-11
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1510.01172 Latest version (application/pdf)

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:arx:papers:1510.01172

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().