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Modeling VXX under jump diffusion with stochastic long‐term mean

Sebastian A. Gehricke and Jin E. Zhang

Journal of Futures Markets, 2020, vol. 40, issue 10, 1508-1534

Abstract: We develop a model for the VXX, the most actively traded VIX futures exchange‐traded note, using Duffie, Pan, and Singleton's affine jump diffusion framework, where the volatility process has jumps and a stochastic long‐term mean. We calibrate the model parameters using the VIX term structure data and show that our model provides the theoretical link between the VIX, VIX futures, and the VXX. Our model can be used for pricing VIX futures, the VXX and other short‐term VIX futures exchange‐traded products (ETPs). Our model could be extended to price options on the VXX and other short‐term VIX futures ETPs.

Date: 2020
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