Price discovery in the volatility index option market: A univariate GARCH approach

Pierre J Venter and Eben Maré

Finance Research Letters, 2022, vol. 44, issue C

Abstract: In this paper, the GARCH option pricing model is applied to the Standard and Poor’s 500 (S&P500) Volatility Index (VIX) option pricing. The purpose is to determine whether the GARCH option pricing model can be used for price discovery in the volatility index option market. The different GARCH models are fitted to VIX futures returns. The pricing performance is tested by comparing the option prices implied by the models to market option prices. The results show that the symmetric GARCH model with skewed Student-t errors is the best performing model, and that the GARCH option pricing model provides reasonable price discovery when applied to the VIX.

Keywords: GARCH; Option pricing; VIX (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001501

DOI: 10.1016/j.frl.2021.102069

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