A remark on Lin and Chang's paper ‘Consistent modeling of S&P 500 and VIX derivatives’
AbstractLin and Chang (2009, 2010) establish a VIX futures and option pricing theory when modeling S&P 500 index by using a stochastic volatility process with asset return and volatility jumps. In this note, we prove that Lin and Chang's formula is not an exact solution of their pricing equation. More generally, we show that the characteristic function of their pricing equation cannot be exponentially affine, as proposed by them. Furthermore, their formula cannot serve as a reasonable approximation. Using the (Heston, 1993) model as a special case, we demonstrate that Lin and Chang formula misprices VIX futures and options in general and the error can become substantially large.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 36 (2012)
Issue (Month): 5 ()
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Web page: http://www.elsevier.com/locate/jedc
VIX option pricing; Affine jump diffusion; Characteristic function;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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