A simplified pricing model for volatility futures

Brice Dupoyet, Robert T. Daigler and Zhiyao Chen

Journal of Futures Markets, 2011, vol. 31, issue 4, 307-339

Abstract: We develop a general model to price VIX futures contracts. The model is adapted to test both the constant elasticity of variance (CEV) and the Cox–Ingersoll–Ross formulations, with and without jumps. Empirical tests on VIX futures prices provide out‐of‐sample estimates within 2% of the actual futures price for almost all futures maturities. We show that although jumps are present in the data, the models with jumps do not typically outperform the others; in particular, we demonstrate the important benefits of the CEV feature in pricing futures contracts. We conclude by examining errors in the model relative to the VIX characteristics. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:307–339, 2011

Date: 2011
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