Work

Pricing VIX Futures and Options With Good and Bad Volatility of Volatility

Year: 2024

Type: article

Abstract: ABSTRACT This article studies the pricing of VIX futures and options by directly modeling the dynamics of VIX, based on realized semivariances computed from high‐frequency data of VIX. We derive the closed‐form pricing formula for both the VIX futures and options. The empirical results show that the new model provides superior pricing performance compared with the model based on conventional unsigned realized variance and the classic Heston‐Nandi GARCH model, both in sample and out of sample. Our study confirms that the decomposition of realized variance into upside and downside components helps to improve the pricing performance for VIX futures and options.

Source: Journal of Futures Markets

DOI: 10.1002/fut.22545

Authors: Zhiyu Guo, Zhuo Huang, Chen Tong

Institutions: China Foreign Affairs University, Peking University, Xiamen University

Language: English

Topic: Financial Risk and Volatility Modeling

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

Funders: National Natural Science Foundation of China, Ministry of Education of the People's Republic of China, Xiamen University

Awards: G3325401312, G5632622745, G8862886512