VIX option pricing and CBOE VIX Term Structure: A new methodology for volatility derivatives valuation

Yueh-Neng Lin

Journal of Banking & Finance, 2013, vol. 37, issue 11, 4432-4446

Abstract: This study integrates CBOE VIX Term Structure and VIX futures to simplify VIX option pricing in multifactor models. Exponential and hump volatility functions with one- to three-factor models of the VIX evolution are used to examine their pricing for VIX options across strikes and maturities. The results show that using exponential volatility functions presents an effective choice as pricing models for VIX calls, whereas hump volatility functions provide efficient out-of-sample valuation for most VIX puts, in particular with deep in-the-money and deep out-of-the-money. Pricing errors for calls can be further reduced with a two-factor model.

Keywords: CBOE VIX Term Structure; VIX futures; Numéraire; Multifactor models; Hump volatility function; Exponential volatility function (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:11:p:4432-4446

DOI: 10.1016/j.jbankfin.2013.03.006

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