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Trading VIX futures under mean reversion with regime switching

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  • Jiao Li

    (APAM Department, Columbia University, New York, NY 10027, United States)

Abstract

This paper studies the optimal VIX futures trading problems under a regime-switching model. We consider the VIX as mean reversion dynamics with dependence on the regime that switches among a finite number of states. For the trading strategies, we analyze the timings and sequences of the investor’s market participation, which leads to several corresponding coupled system of variational inequalities. The numerical approach is developed to solve these optimal double stopping problems by using projected-successive-over-relaxation (PSOR) method with Crank–Nicolson scheme. We illustrate the optimal boundaries via numerical examples of two-state Markov chain model. In particular, we examine the impacts of transaction costs and regime-switching timings on the VIX futures trading strategies.

Suggested Citation

  • Jiao Li, 2016. "Trading VIX futures under mean reversion with regime switching," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 1-20, September.
    • Handle: RePEc:wsi:ijfexx:v:03:y:2016:i:03:n:s2424786316500213
    DOI: 10.1142/S2424786316500213
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    References listed on IDEAS

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    Cited by:

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    2. Tim Leung & Brian Ward, 2018. "Dynamic Index Tracking and Risk Exposure Control Using Derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 25(2), pages 180-212, March.

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