VIX option pricing

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Abstract

Substantial progress has been made in developing more realistic option pricing models for S&P 500 index (SPX) options. Empirically, however, it is not known whether and by how much each generalization of SPX price dynamics improves VIX option pricing. This article fills this gap by first deriving a VIX option model that reconciles the most general price processes of the SPX in the literature. The relative empirical performance of several models of distinct interest is examined. Our results show that state-dependent price jumps and volatility jumps are important for pricing VIX options. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:523–543, 2009

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