Economics at your fingertips  

A regime-switching Heston model for VIX and S&P 500 implied volatilities

Andrew Papanicolaou and Ronnie Sircar

Quantitative Finance, 2014, vol. 14, issue 10, 1811-1827

Abstract: Volatility products have become popular in the past 15 years as a hedge against market uncertainty. In particular, there is growing interest in options on the VIX volatility index. A number of recent empirical studies have examine whether there is significantly greater risk premium in VIX option prices compared with S&P 500 option prices. We address this issue by proposing and analysing a stochastic volatility model with regime switching. The basic Heston model cannot capture VIX-implied volatilities, as has been documented. We show that the incorporation of sharp regime shifts can bridge this shortcoming. We take advantage of asymptotic and Fourier methods to make the extension tractable, and we present a fit to data, both in times of crisis and relative calm, which shows the effectiveness of the regime switching.

Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link) (text/html)
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:

Ordering information: This journal article can be ordered from

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Series data maintained by Chris Longhurst ().

Page updated 2017-10-21
Handle: RePEc:taf:quantf:v:14:y:2014:i:10:p:1811-1827