VIX VERSUS VXX: A JOINT ANALYTICAL FRAMEWORK

Martino Grasselli and Lakshithe Wagalath
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Martino Grasselli: Department of Mathematics, University of Padova, Via Trieste 63, Padova, Italy2Léonard de Vinci Pôle Universitaire, Research Center, 92916 Paris La Défense, France
Lakshithe Wagalath: IESEG School of Management, 3 rue de la Digue, 59000 Lille, France4LEM-CNRS 9221, 3 rue de la Digue, 59000 Lille, France

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 05, 1-39

Abstract: We propose a framework for modeling in a consistent manner the VIX index and the VXX, an exchange-traded note written on the VIX. Our study enables to link the properties of VXX to those of the VIX in a tractable way. In particular, we quantify the systematic loss observed empirically for VXX when the VIX futures term-structure is in contango and we derive option prices, implied volatilities and skews of VXX from those of VIX in infinitesimal developments. We also perform a calibration on real data which highlights the flexibility of our model in fitting the futures and the vanilla options market of VIX and VXX. Our framework can be used to model other exchange-traded notes on the VIX as well as any market where exchange-traded notes have been introduced on a reference index, hence providing tools to better anticipate and quantify systematic behavior of an exchange-traded note with respect to the underlying index.

Keywords: Volatility index; VIX; VIX exchange-traded notes; VXX (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024920500338

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