HEDGING STRATEGY COMPARISONS OF VOLATILITY INDEX OPTIONS USING DIFFUSION MODELS

Jun-Biao Lin

The International Journal of Business and Finance Research, 2015, vol. 9, issue 3, 59-69

Abstract: With the innovation of derivatives, the Standard and Poor’s (S&P) 500 index -- as an underlying asset of the volatility index (VIX) introduced by the Chicago Board Options Exchange (CBOE) -- was adopted as the research subject in this study. Since the financial crisis of 2008, the degree of market volatility has increased substantially. In addition, a random process has been found jumping about in the VIX data. In this study we compare VIX options based on different diffusion models. In this study, when a jump component is considered in the VIX process, the expectation maximization (EM) method is used to estimate parameters; this is a different perspective of evaluation from other studies. This paper further analyzes different hedging strategies based on different diffusion models

Keywords: VIX; Jump Process; MLE; EM Algorithm; Hedging Strategy (search for similar items in EconPapers)
JEL-codes: G13 G17 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:ibf:ijbfre:v:9:y:2015:i:3:p:59-69

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