Valuation of vix derivatives
Javier Mencia () and
Enrique Sentana ()
No 1232, Working Papers from Banco de España, Working Papers Homepage
We conduct an extensive empirical analysis of VIX derivative valuation models before, during and after the 2008-2009 financial crisis. Since the restrictive mean reversion and heteroskedasticity features of existing models yield large distortions during the crisis, we propose generalisations with a time varying central tendency, jumps and stochastic volatility, and analyse their pricing performance, and implications for term structures of VIX futures and volatility «skews». We find that a process for the log of the observed VIX combining central tendency and stochastic volatility reliably prices VIX derivatives. We also uncover a significant risk premium that shifts the long-run volatility level
Keywords: central tendency; stochastic volatility; jumps; term structure; volatility skews (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
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Journal Article: Valuation of VIX derivatives (2013)
Working Paper: Valuation of VIX Derivatives (2010)
Working Paper: Valuation of VIX Derivatives (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1232
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