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Valuation of vix derivatives

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  • Javier Mencía

    ()
    (Banco de España)

  • Enrique Sentana

    (CEMFI)

Abstract

We conduct an extensive empirical analysis of VIX derivative valuation models before, during and after the 2008-2009 financial crisis. Since the restrictive mean reversion and heteroskedasticity features of existing models yield large distortions during the crisis, we propose generalisations with a time varying central tendency, jumps and stochastic volatility, and analyse their pricing performance, and implications for term structures of VIX futures and volatility «skews». We find that a process for the log of the observed VIX combining central tendency and stochastic volatility reliably prices VIX derivatives. We also uncover a significant risk premium that shifts the long-run volatility level

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/12/Fich/dt1232e.pdf
File Function: First version, September 2011
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1232.

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Length: 68 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:bde:wpaper:1232

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Keywords: central tendency; stochastic volatility; jumps; term structure; volatility skews;

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