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Valuation of vix derivatives

Javier Mencia () and Enrique Sentana ()

No 1232, Working Papers from Banco de España, Working Papers Homepage

Abstract: 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)
Date: 2012-09
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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... /12/Fich/dt1232e.pdf First version, September 2011 (application/pdf)

Related works:
Journal Article: Valuation of VIX derivatives (2013) Downloads
Working Paper: Valuation of VIX Derivatives (2010) Downloads
Working Paper: Valuation of VIX Derivatives (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1232

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