VIX option pricing and CBOE VIX Term Structure: A new methodology for volatility derivatives valuation |
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Authors: | Yueh-Neng Lin |
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Institution: | Imperial College Business School, 53 Princes Gate, South Kensington Campus, London SW7 2AZ, United Kingdom; Department of Finance, National Chung Hsing University, 250, Kuo-Kuang Road, Taichung, Taiwan |
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Abstract: | This study integrates CBOE VIX Term Structure and VIX futures to simplify VIX option pricing in multifactor models. Exponential and hump volatility functions with one- to three-factor models of the VIX evolution are used to examine their pricing for VIX options across strikes and maturities. The results show that using exponential volatility functions presents an effective choice as pricing models for VIX calls, whereas hump volatility functions provide efficient out-of-sample valuation for most VIX puts, in particular with deep in-the-money and deep out-of-the-money. Pricing errors for calls can be further reduced with a two-factor model. |
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Keywords: | G12 G13 G14 |
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