Valuation of VIX Derivatives

Enrique Sentana and Mencía, Javier
Authors registered in the RePEc Author Service: Javier Mencia ()

No 7619, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We conduct an extensive empirical analysis of VIX derivative valuation models over the 2004-2007 bull market and the subsequent financial crisis. We show that existing models yield large distortions during the crisis because of their restrictive volatility mean reverting assumptions. We propose generalisations with a time varying central tendency, jumps and stochastic volatility, analyse their pricing performance, and their implications for the term structures of VIX futures and options, and the option volatility "skews". We find that a model combining central tendency and stochastic volatility is required to reliably price VIX futures and options, respectively, across bull and bear markets.

Keywords: Central tendency; Jumps; stochastic volatility; Term structure; Volatility skews (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2010-01
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Related works:
Journal Article: Valuation of VIX derivatives (2013)
Working Paper: Valuation of vix derivatives (2012)
Working Paper: Valuation of VIX Derivatives (2009)
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