Valuation of VIX derivatives
Javier Mencia () and
Enrique Sentana ()
Journal of Financial Economics, 2013, vol. 108, issue 2, 367-391
We conduct an extensive empirical analysis of VIX derivative valuation models before, during, and after the 2008–2009 financial crisis. Since the restrictive mean-reversion and heteroskedasticity features of existing models yield large distortions during the crisis, we propose generalisations with a time-varying central tendency, jumps, and stochastic volatility, analyse their pricing performance, and implications for term structures of VIX futures and volatility “skews.” We find that a process for the log of the observed VIX combining central tendency and stochastic volatility reliably prices VIX derivatives. We also uncover a significant risk premium that shifts the long-run volatility level.
Keywords: Central tendency; Stochastic volatility; Jumps; Term structure; Volatility skews (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
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Working Paper: Valuation of vix derivatives (2012)
Working Paper: Valuation of VIX Derivatives (2010)
Working Paper: Valuation of VIX Derivatives (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:108:y:2013:i:2:p:367-391
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