VIX derivatives, hedging and vol-of-vol risk

Andreas Kaeck and Norman J. Seeger

European Journal of Operational Research, 2020, vol. 283, issue 2, 767-782

Abstract: We study the empirical hedging performance of alternative VIX option pricing models. Recent advances in the literature find evidence of asymmetric volatility-of-volatility (similar to the leverage effect in equity markets), stochastic mean-reversion and jumps. Using such findings in our model framework, we show that while sophisticated models have superior pricing performance and can explain a range of stylized facts in the VIX derivatives market, their hedging performance is inferior to a simple Black model hedge. We also study the empirical performance of regime-dependent hedge ratio adjustments commonly applied in equity markets.

Keywords: Risk management; VIX options; Stochastic volatility of volatility; Hedging performance, (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:283:y:2020:i:2:p:767-782

DOI: 10.1016/j.ejor.2019.11.034

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