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The effects of asymmetric volatility and jumps on the pricing of VIX derivatives

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  • Park, Yang-Ho

Abstract

This paper proposes a collection of affine jump–diffusion models for the valuation of VIX derivatives. The models have two distinctive features. First, we allow for a positive correlation between changes in the VIX and its stochastic volatility to accommodate asymmetric volatility. Second, upward and downward jumps in the VIX are separately modeled to accommodate the possibility that investors react differently to good and bad surprises. Using the VIX futures and options data from July 2006 through January 2013, we find conclusive evidence for both asymmetric volatility and upward jumps in VIX derivative prices. However, we find little evidence supporting downward jumps.

Suggested Citation

  • Park, Yang-Ho, 2016. "The effects of asymmetric volatility and jumps on the pricing of VIX derivatives," Journal of Econometrics, Elsevier, vol. 192(1), pages 313-328.
  • Handle: RePEc:eee:econom:v:192:y:2016:i:1:p:313-328
    DOI: 10.1016/j.jeconom.2016.01.001
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    Citations

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    Cited by:

    1. Gloria Gonzalez-Rivera & Joao Henrique Mazzeu & Esther Ruiz & Helena Veiga, 2017. "A Bootstrap Approach for Generalized Autocontour Testing. Implications for VIX Forecast Densities," Working Papers 201709, University of California at Riverside, Department of Economics.
    2. repec:eee:dyncon:v:85:y:2017:i:c:p:59-89 is not listed on IDEAS
    3. repec:eee:riibaf:v:44:y:2018:i:c:p:459-470 is not listed on IDEAS
    4. repec:ids:ijbder:v:3:y:2017:i:2:p:153-175 is not listed on IDEAS
    5. Veiga, Helena & Ruiz, Esther & González-Rivera, Gloria & Gonçalves Mazzeu, Joao Henrique, 2016. "A Bootstrap Approach for Generalized Autocontour Testing," DES - Working Papers. Statistics and Econometrics. WS 23457, Universidad Carlos III de Madrid. Departamento de Estadística.
    6. Wei Lin & Shenghong Li & Shane Chern, 2017. "Pricing VIX Derivatives With Free Stochastic Volatility Model," Papers 1703.06020, arXiv.org.

    More about this item

    Keywords

    VIX options; VIX futures; Stochastic volatility; Volatility smile; Jump–diffusion;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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