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Pricing VIX options with volatility clustering

Bo Jing, Shenghong Li and Yong Ma

Journal of Futures Markets, 2020, vol. 40, issue 6, 928-944

Abstract: We investigate the valuation of volatility index (VIX) options by developing a model with a self‐exciting Hawkes process that allows for clustering in the VIX. In the proposed framework, we find semianalytical expressions for the characteristic function and forward characteristic function, and then we solve the pricing problem of standard‐start and forward‐start options via the fast Fourier transform. The empirical results provide evidence to support the significance of accounting for volatility clustering when pricing VIX options.

Date: 2020
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https://doi.org/10.1002/fut.22092

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