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Price discovery in the volatility index option market: A univariate GARCH approach

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  • Venter, Pierre J
  • Maré, Eben

Abstract

In this paper, the GARCH option pricing model is applied to the Standard and Poor’s 500 (S&P500) Volatility Index (VIX) option pricing. The purpose is to determine whether the GARCH option pricing model can be used for price discovery in the volatility index option market. The different GARCH models are fitted to VIX futures returns. The pricing performance is tested by comparing the option prices implied by the models to market option prices. The results show that the symmetric GARCH model with skewed Student-t errors is the best performing model, and that the GARCH option pricing model provides reasonable price discovery when applied to the VIX.

Suggested Citation

  • Venter, Pierre J & Maré, Eben, 2022. "Price discovery in the volatility index option market: A univariate GARCH approach," Finance Research Letters, Elsevier, vol. 44(C).
    • Handle: RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001501
    DOI: 10.1016/j.frl.2021.102069
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    Keywords

    GARCH; Option pricing; VIX;
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