Using VIX futures to hedge forward implied volatility risk

Yueh-Neng Lin and Anchor Y. Lin

International Review of Economics & Finance, 2016, vol. 43, issue C, 88-106

Abstract: The fair value of VIX futures is derived by pricing the forward 30-day volatility which underlies the volatility risk of S&P 500 in the 30days after the futures expiration. While forward implied volatility can also be traded with forward-start strangles, this study demonstrates that VIX futures could offer more effective volatility-risk hedge for an investor who has a short position on the S&P 500 futures call option. In particular, the delta-vega-neutral hedging strategy incorporating stochastic volatility on average outperforms in out-of-sample hedging. Adding price jumps further enhances the hedging performance during the crash period.

Keywords: VIX futures; Forward implied volatility; Forward-start strangles; Stochastic volatility; Price jumps (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:43:y:2016:i:c:p:88-106

DOI: 10.1016/j.iref.2015.10.033

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