Valuation of VIX derivatives |
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Authors: | Javier Mencía Enrique Sentana |
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Institution: | 1. Banco de España, Alcalá, 48, E-28014 Madrid, Spain;2. CEMFI, Casado del Alisal, 5, E-28014 Madrid, Spain |
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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, 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. |
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Keywords: | G13 |
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