THE VIX AND FUTURE INFORMATION

Markus Hess ()
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Markus Hess: Frankfurt/Main, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2021, vol. 24, issue 06n07, 1-30

Abstract: In this paper, we propose an innovative VIX model which takes future market information available to the traders into account. The future information is modeled by an initially enlarged filtration in our setup. We derive an explicit representation for the anticipative VIX process and obtain the associated time dynamics. We also investigate the pricing of variance swaps under both backward- and forward-looking information. We finally deduce the optimal mean variance hedging portfolio in a financial market consisting of a bank account and a VIX futures. In order to have some benchmark model available, we introduce a non-anticipative stochastic volatility stock price model right at the beginning and infer representations for the related VIX index, the VIX futures and a VIX call option.

Keywords: VIX index/futures/option; variance swap; realized volatility; mean variance hedging; Barndorff-Nielsen–Shephard (BNS) stochastic volatility model; information premium; Lévy process; enlarged filtration; stochastic differential equation (SDE); stochastic maximum principle (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219024921500382

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