Short communication: inversion of convex ordering: local volatility does not maximise the price of VIX futures

Beatrice Acciaio and Julien Guyon

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: It has often been stated that, within the class of continuous stochastic volatility models calibrated to vanillas, the price of a VIX future is maximized by the Dupire local volatility model. In this article we prove that this statement is incorrect: we build a continuous stochastic volatility model in which a VIX future is strictly more expensive than in its associated local volatility model. More generally, in our model, strictly convex payoffs on a squared VIX are strictly cheaper than in the associated local volatility model. This corresponds to an inversion of convex ordering between local and stochastic variances, when moving from instantaneous variances to squared VIX, as convex payoffs on instantaneous variances are always cheaper in the local volatility model. We thus prove that this inversion of convex ordering, which is observed in the S&P 500 market for short VIX maturities, can be produced by a continuous stochastic volatility model. We also prove that the model can be extended so that, as suggested by market data, the convex ordering is preserved for long maturities.

Keywords: VIX; VIX futures; stochastic volatility; local volatility; convex order; inversion of convex ordering (search for similar items in EconPapers)
JEL-codes: C1 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2020-02-20
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (3)

Published in SIAM Journal on Financial Mathematics, 20, February, 2020, 11(1), pp. SC1 - SC13. ISSN: 1945-497X

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:102984

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