A dimension-invariant cascade model for VIX futures |
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Authors: | Zhiguang Wang Brice Dupoyet |
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Institution: | 1. Ness School of Management and Economics, South Dakota State University, Brookings, South Dakota;2. Department of Finance, Florida International University, Miami, Florida |
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Abstract: | We propose a new stochastic volatility model by allowing for a cascading structure of volatility components. The model, under a minor assumption, allows us to add as many components as desired with no additional parameters, effectively defeating the curse of dimensionality often encountered in traditional models. We derive a semi-closed-form solution to the VIX futures price, and find that our six-factor model with only six parameters can closely fit spot VIX and VIX futures prices from 2004 to 2015 and produce out-of-sample pricing errors of magnitudes similar to those of in-sample errors. |
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Keywords: | cascade dimension-invariant term structure VIX futures |
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