A simplified pricing model for volatility futures

Dupoyet, Brice V.; Daigler, Robert T.; Chen, Zhiyao

doi:10.1002/fut.20471

Cited by 25 publications

(7 citation statements)

References 62 publications

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“…() provide a comprehensive analysis on the VIX futures market. Dupoyet, Daigler, and Chen () show that the CEV feature has an advantage in pricing VIX futures. Konstantinidi and Skiadopoulos () investigate whether VIX futures prices are predictable.…”

Section: Introductionmentioning

confidence: 99%

The Term Structure of VIX

Luo

Zhang

2012

Journal of Futures Markets

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In this study, we extend the Chicago Board Options Exchange volatility index, VIX, from 30‐day to any arbitrary time‐to‐maturity, and study the term structure of VIX. We propose new concepts of instantaneous and long‐term squared VIXs as the limits at the short and long ends of the term structure respectively. Modeling the volatility process with instantaneous and long‐term squared VIXs, we establish a parsimonious approach to capture information contained in the term structure of VIX. Our study provides an efficient setup to further study the pricing of VIX derivatives and their relation with S&P 500 options.

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Section: Introductionmentioning

confidence: 99%

The Term Structure of VIX

Luo

Zhang

2012

Journal of Futures Markets

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“…The latter independent variable owes to the empirical evidence that the reaction of VIX futures prices to equity returns is more subdued for VIX futures contracts that are further from settlement, consistent with the mean-reverting tendencies of the VIX demonstrated by Zhang and Zhu [2006], Zhang et al [2010], and Dupoyet et al [2011]. Because our trading simulations assume that traders buy or sell the nearest VIX futures contract that settles in at least 10 business days, VIX futures price changes in Equation (3) are based on the same contracts and are adjusted for breaks between contracts.…”

Section: Vix Futures Trading Strategiesmentioning

confidence: 64%

“…Other studies, such as Zhang and Zhu [2006], Zhang et al [2010], and Dupoyet et al [2011], focus on modeling the VIX futures curve. These studies assume that volatility follows a mean-reverting process, which implies that the basis ref lects the riskneutral expected path of volatility.…”

Section: This Study Demonstrates That the Vix Futures Basis Does Not mentioning

confidence: 99%

The VIX Futures Basis: Evidence and Trading Strategies

Simon¹,

Campasano²

2014

JOD

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This study demonstrates that the VIX futures basis does not have significant forecast power for the change in the spot VIX from 2006 through 2011 but does have forecast power for VIX futures price changes. The study then demonstrates the profitability of shorting VIX futures contracts when the basis is in contango and buying VIX futures contracts when the basis is in backwardation with the market exposure of these positions hedged with mini-S&P 500 futures positions. The results indicate that these trading strategies are highly profitable and robust to transaction costs and out of sample hedge ratio forecasts. Overall, the analysis supports the view that the VIX futures basis does not accurately reflect the mean-reverting properties of the VIX spot index but rather reflects a risk premium that can be harvested. The VIX Futures Basis: Evidence and Trading StrategiesVolatility has become a widely accepted asset class since the introduction of the VIX futures contract in 2004. The popularity of the VIX futures contract stems from its hedging properties, which owe to its reliably negative correlation with equity returns and its usefulness as insurance against tail risk.1 Szado (2010) and Alexander and Korovilas (2011) (2011), focus on modeling the VIX futures curve. These studies assume that volatility follows a mean reverting process, which implies that the basis reflects the risk-neutral expected path of volatility. 2 Accordingly, when the VIX futures curve is upward sloped (in contango), the VIX is expected to rise because it is low relative to long run levels, as reflected by higher VIX futures prices.3 Likewise, when the VIX futures curve is inverted (in backwardation), the VIX is expected to fall because it is above its long run levels, as reflected by lower VIX futures prices. Thus, 1 Tail risk hedging refers to hedging against extreme adverse market moves and was championed by Taleb (2007), who claims that such events are far more frequent than market participants generally believe. Tail risk insurance became extremely popular in the aftermath of the large equity market declines associated with the financial panic that began in 2008.2 Because the VIX index is not readily tradable, the basis is not determined by cash and carry and reverse cash and carry arbitrage as is typically the case for most financial futures contracts. 3 For expositional ease this study refers to the VIX spot price as the VIX and the relationship between VIX futures prices and the VIX as the VIX futures curve. This study also describes VIX futures trading above the VIX as contango or an upward sloped VIX futures curve and VIX futures trading below the VIX as backwardation or an inverted VIX futures curve.2 contango and backwardation reflect risk-neutral expected VIX increases and decreases, respectively, and the steepness of the curve in either case reflects the speed of mean-reversion.The recent empirical evidence on the forecast power of models calibrated to the VIX futures curve indicates satisfactory out of sample forecas...

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“…Zhu and Zhang () extend Zhang and Zhu () to a model with time‐varying long‐term mean of variance. Later on, Lin (), Lu and Zhu (), Dupoyet, Daigler and Chen (), and Zhu and Lian () examine more complicated models for VIX futures. Meanwhile, Sepp (, ), Albanese, Lo, and Mijatović (), Lin and Chang (), Li (), Chung, Tsai, Wang, and Weng (), Wang and Daigler (), Chen and Poon (), Lian and Zhu (), Papanicolaou and Sircar (), Branger, Kraftschik, and Volkert (), Song and Xiu (), Lin, Li, Luo, and Chern (), Romo (), Bardgett, Gourier, and Leippold (), and Lo, Shih, Wang, and Yu () investigate various specifications for pricing VIX options.…”

Section: Introductionmentioning

confidence: 99%

Instantaneous squared VIX and VIX derivatives

Luo

Zhang

2019

Journal of Futures Markets

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In this paper, we propose a parsimonious and efficient model to price derivatives written on VIXs with different horizons. Our model is built on Luo and Zhang's (2012, J Futures Markets, 32, 1092–1123) concept of the instantaneous squared VIX (ISVIX) that is the sum of instantaneous diffusive and jump variances of the SPX return. Modeling the ISVIX as a mean‐reverting jump‐diffusion process with a stochastic long‐term mean, we obtain analytical formulas for VIX options and futures. Estimation with VIX term structure and calibration with VIX options data show that our model performs well in matching both time series and cross‐sectional VIX derivatives market prices.

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A simplified pricing model for volatility futures

Cited by 25 publications

References 62 publications

The Term Structure of VIX

The Term Structure of VIX

The VIX Futures Basis: Evidence and Trading Strategies

Instantaneous squared VIX and VIX derivatives

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