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GARCH DIFFUSION MODEL, iVIX, AND VOLATILITY RISK PREMIUM

Author

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  • Xinyu WU

    (School of Finance, Anhui University of Finance and Economics, China)

  • Hailin ZHOU

    (School of Finance, Anhui University of Finance and Economics, China)

Abstract

This paper investigates the volatility risk premium in the non-affine GARCH diffusion model of stochastic volatility using the Chinese Volatility Index (iVIX). Firstly, we derive the corresponding implied iVIX formula under the GARCH diffusion model. Then, using joint data on the Shanghai 50ETF and iVIX index, we develop an efficient importance sampling (EIS)-based joint maximum likelihood (ML) estimation method for the objective and risk-neutral parameters of the GARCH diffusion model. Furthermore, a particle filter-based estimation method is developed for extracting the latent volatility. Finally, we apply our proposed approach to the actual data on the Shanghai 50ETF and iVIX index. Empirical results show that the volatility risk is priced by the market, and the volatility risk premium is negative, implying that investors act risk averse in the Shanghai stock market.

Suggested Citation

  • Xinyu WU & Hailin ZHOU, 2016. "GARCH DIFFUSION MODEL, iVIX, AND VOLATILITY RISK PREMIUM," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 50(1), pages 327-342.
    • Handle: RePEc:cys:ecocyb:v:50:y:2016:i:1:p:327-342
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    GARCH diffusion model; iVIX; volatility risk premium; efficient importance sampling; particle filter.;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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