A New Model for the Joint Valuation of S&P 500 and VIX Options: Specification Analysis

Peixuan Yuan ()
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Peixuan Yuan: School of Business, Hong Kong Baptist University, Hong Kong, China

Management Science, 2025, vol. 71, issue 5, 3891-3923

Abstract: Analyzing the specifications of pricing models for the joint valuation of S&P 500 and VIX options, I find that the existing models cannot adequately represent the two options markets. I introduce a new factor that controls the higher-order moments of the risk-neutral return distribution. The model I propose significantly outperforms all other alternatives, and particularly improves on the benchmark two-variance-factor model with cojumps by 23.66% in-sample and 31.64% out-of-sample. The performance analysis shows that the better fit results from improvements in the modeling of both S&P 500 and VIX options, highlighting the model features that are critical for reconciling the two markets.

Keywords: option pricing; S&P 500 and VIX joint valuation; higher-order moments; specification analysis; model features (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:5:p:3891-3923

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