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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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    More about this item

    Keywords

    VIX options; VIX futures; Stochastic volatility; Volatility smile; Jump–diffusion;
    All these keywords.

    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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