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Pricing CBOE VIX in non-affine GARCH models with variance risk premium

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  • Tong, Chen

Abstract

The commonly used local risk-neutral valuation relationship (LRNVR) for non-affine GARCH models only compensates for the equity risk premium. In this paper, we propose a direct approach to bridge the physical and risk-neutral measures for non-affine GARCH models, explicitly accounting for the variance risk premium. This method avoids the need to specify a particular form of pricing kernel when it is potentially complex. The closed-form CBOE VIX pricing formulas can be easily derived for several popular non-affine GARCH models, including EGARCH, GJR-GARCH, and NGARCH. Empirical results demonstrate that the newly proposed framework yields superior pricing performance for CBOE VIX.

Suggested Citation

  • Tong, Chen, 2024. "Pricing CBOE VIX in non-affine GARCH models with variance risk premium," Finance Research Letters, Elsevier, vol. 62(PA).
    • Handle: RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324001454
    DOI: 10.1016/j.frl.2024.105115
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    More about this item

    Keywords

    Generalized LRNVR; VIX pricing; Non-affine GARCH; Variance risk premium; Risk neutralization;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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