The authors are grateful for the insightful comments of the anonymous referees who have helped to improve the paper.
STOCHASTIC VOLATILITY MODELS AND THE PRICING OF VIX OPTIONS
Article first published online: 9 FEB 2012
© 2012 Wiley Periodicals, Inc.
Volume 23, Issue 3, pages 439–458, July 2013
How to Cite
Goard, J. and Mazur, M. (2013), STOCHASTIC VOLATILITY MODELS AND THE PRICING OF VIX OPTIONS. Mathematical Finance, 23: 439–458. doi: 10.1111/j.1467-9965.2011.00506.x
- Issue published online: 8 JUN 2013
- Article first published online: 9 FEB 2012
- Manuscript received May 2010; final version received May 2011.
- stochastic volatility;
- volatility model;
- VIX options
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.