STOCHASTIC VOLATILITY MODELS AND THE PRICING OF VIX OPTIONS

By Joanna M. Goard, M. Mazur. 2013

101 citations recorded by the source corpus.

In this paper, we examine and compare the performance of a variety of continuous‐time volatility models in their ability to capture the behavior of the VIX. The “3/2‐ model” with a diffusion structure which allows the volatility of volatility changes to be highly sensitive to the actual level of volatility is found to outperform all other popular models tested. Analytic solutions for option prices on the VIX under the 3/2‐model are developed and then used to calibrate at‐the‐money market option prices.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/103e1016e92aee36ab58c62edbc2ca52f67c091d

Citations in the corpus

• Euler approximations with varying coefficients: The case of superlinearly growing diffusion coefficients (2013, unknown): “≥ This SDE is chosen since its one-dimensional version is the popular 3 / 2-model in Finance (see, e.g., [1] and the references therein), which is used for modelling (nonaffine) stochastic volatility processes and for pricing VIX options.”