GARCH Option Pricing Models, the CBOE VIX, and Variance Risk Premium

Jinji Hao and Jin E. Zhang

Journal of Financial Econometrics, 2013, vol. 11, issue 3, 556-580

Abstract: In this article, we derive the corresponding implied VIX formulas under the locally risk-neutral valuation relationship (LRNVR) proposed by Duan (1995) when a class of square-root stochastic autoregressive volatility (SR-SARV) models are proposed for S&P 500 index. The empirical study shows that the GARCH implied VIX is consistently and significantly lower than the CBOE VIX for all kinds of GARCH model investigated when they are estimated with returns only. When jointly estimated with both returns and VIX, the parameters are distorted unreasonably, and the GARCH implied VIX still cannot fit the CBOE VIX from various statistical aspects. The source of this discrepancy is then theoretically analyzed. We conclude that the GARCH option pricing under the LRNVR fails to incorporate the price of volatility or variance risk premium. Copyright The Author, 2013. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (46)

Downloads: (external link)
http://hdl.handle.net/10.1093/jjfinec/nbs026 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:jfinec:v:11:y:2013:i:3:p:556-580

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani

More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().