Joint modeling of VIX and SPX options at a single and common maturity with risk management applications

Peter Carr and Dilip B. Madan

IISE Transactions, 2014, vol. 46, issue 11, 1125-1131

Abstract: A double gamma model is proposed for the VIX. The VIX is modeled as gamma distributed with a mean and variance that respond to a gamma-distributed realized variance over the preceeding month. Conditional on VIX and the realized variance, the logarithm of the stock is variance gamma distributed with affine conditional drift and quadratic variation. The joint density for the triple realized variance, VIX, and the SPX is in closed form. Maximum likelihood estimation on time series data addresses model adequacy. A joint calibration of the model to SPX and VIX options is employed to illustrate a risk management application hedging realized volatility options.

Date: 2014
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DOI: 10.1080/0740817X.2013.857063

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