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Consistent and efficient pricing of SPX and VIX options under multiscale stochastic volatility

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  • Jaegi Jeon
  • Geonwoo Kim
  • Jeonggyu Huh

Abstract

We provide consistent and efficient pricing for both Standard & Poor's 500 Index options and the Chicago Board Options Exchange's Volatility Index options under a multiscale stochastic volatility model. To capture the multiscale, our model adds a fast scale factor to Heston's volatility and we derive approximate analytic formulas for the options under the model. The analytic tractability can greatly improve the efficiency of calibration compared to fitting procedures using a numerical scheme. Our experiment using options data for 3 years shows that the model reduces about 20% of the errors for a single‐scale model.

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  • Jaegi Jeon & Geonwoo Kim & Jeonggyu Huh, 2021. "Consistent and efficient pricing of SPX and VIX options under multiscale stochastic volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(5), pages 559-576, May.
    • Handle: RePEc:wly:jfutmk:v:41:y:2021:i:5:p:559-576
    DOI: 10.1002/fut.22190
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    References listed on IDEAS

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    Cited by:

    1. Chen Tong & Zhuo Huang & Tianyi Wang, 2022. "Do VIX futures contribute to the valuation of VIX options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(9), pages 1644-1664, September.
    2. See-Woo Kim & Yong-Ki Ma & Ciprian Necula, 2023. "Modeling Tail Dependence Using Stochastic Volatility Model," Computational Economics, Springer;Society for Computational Economics, vol. 62(1), pages 129-147, June.
    3. Qiang Liu & Yuhan Jiao & Shuxin Guo, 2022. "GARCH pricing and hedging of VIX options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(6), pages 1039-1066, June.

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