VIX term structure and VIX futures pricing with realized volatility |
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Authors: | Zhuo Huang Chen Tong Tianyi Wang |
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Institution: | 1. National School of Development, Peking University, Beijing, China;2. Department of Financial Engineering, School of Banking and Finance, University of International Business and Economics, Beijing, China |
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Abstract: | Using an extended LHARG model proposed by Majewski et al. (2015, J Econ, 187, 521–531), we derive the closed-form pricing formulas for both the Chicago Board Options Exchange VIX term structure and VIX futures with different maturities. Our empirical results suggest that the quarterly and yearly components of lagged realized volatility should be added into the model to capture the long-term volatility dynamics. By using the realized volatility based on high-frequency data, the proposed model provides superior pricing performance compared with the classic Heston–Nandi GARCH model under a variance-dependent pricing kernel, both in-sample and out-of-sample. The improvement is more pronounced during high volatility periods. |
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Keywords: | implied volatility realized volatility VIX futures volatility term structure |
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