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Valuation of VIX derivatives

  • Mencía, Javier
  • Sentana, Enrique

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, 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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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 108 (2013)
Issue (Month): 2 ()
Pages: 367-391

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Handle: RePEc:eee:jfinec:v:108:y:2013:i:2:p:367-391
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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