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Hedging Strategy Comparisons Of Volatility Index Options Using Diffusion Models

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  • Jun-Biao Lin

Abstract

With the innovation of derivatives, the Standard and Poor’s (S&P) 500 index -- as an underlying asset of the volatility index (VIX) introduced by the Chicago Board Options Exchange (CBOE) -- was adopted as the research subject in this study. Since the financial crisis of 2008, the degree of market volatility has increased substantially. In addition, a random process has been found jumping about in the VIX data. In this study we compare VIX options based on different diffusion models. In this study, when a jump component is considered in the VIX process, the expectation maximization (EM) method is used to estimate parameters; this is a different perspective of evaluation from other studies. This paper further analyzes different hedging strategies based on different diffusion models

Suggested Citation

  • Jun-Biao Lin, 2015. "Hedging Strategy Comparisons Of Volatility Index Options Using Diffusion Models," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(3), pages 59-69.
    • Handle: RePEc:ibf:ijbfre:v:9:y:2015:i:3:p:59-69
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    References listed on IDEAS

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    More about this item

    Keywords

    VIX; Jump Process; MLE; EM Algorithm; Hedging Strategy;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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