Consistent pricing of VIX options with the Hawkes jump-diffusion model

Bo Jing, Shenghong Li and Yong Ma

The North American Journal of Economics and Finance, 2021, vol. 56, issue C

Abstract: This paper presents a valuation of VIX options employing a Hawkes jump-diffusion model that captures the clustering pattern of jumps observed extensively in the financial markets. In the consistent framework, the valuation problem of VIX options is solved efficiently via the Fourier cosine expansion (COS) method. The Monte Carlo (MC) simulations are carried out to demonstrate the reliability and efficiency of the COS method. Furthermore, a sensitivity analysis is performed to show how option prices response to different parameters associated with jump clustering. Finally, empirical studies are conducted to provide evidence to support our jump specification in matching the VIX option surface.

Keywords: Consistent approach; VIX options; Hawkes process; Jump-diffusion; COS method (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:56:y:2021:i:c:s1062940820302114

DOI: 10.1016/j.najef.2020.101326

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