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An analytical formula for VIX futures and its applications

Journal Article


Abstract


  • In this study we present a closed-form, exact solution for the pricing of VIX

    futures in a stochastic volatility model with simultaneous jumps in both the asset

    price and volatility processes. The newly derived formula is then used to show

    that the well-known convexity correction approximations can sometimes lead to

    large errors. Utilizing the newly derived formula, we also conduct an empirical

    study, the results of which demonstrate that the Heston stochastic volatility

    model is a good candidate for the pricing of VIX futures. While incorporating

    jumps into the underlying price can further improve the pricing of VIX futures,

    adding jumps to the volatility process appears to contribute little improvement for

    pricing VIX futures. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:166–190,

    2012

Publication Date


  • 2012

Citation


  • Zhu, S. & Lian, G. (2012). An analytical formula for VIX futures and its applications. Journal of Futures Markets, 32 (2), 166-190.

Scopus Eid


  • 2-s2.0-83055176778

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/1991

Has Global Citation Frequency


Number Of Pages


  • 24

Start Page


  • 166

End Page


  • 190

Volume


  • 32

Issue


  • 2

Place Of Publication


  • United States

Abstract


  • In this study we present a closed-form, exact solution for the pricing of VIX

    futures in a stochastic volatility model with simultaneous jumps in both the asset

    price and volatility processes. The newly derived formula is then used to show

    that the well-known convexity correction approximations can sometimes lead to

    large errors. Utilizing the newly derived formula, we also conduct an empirical

    study, the results of which demonstrate that the Heston stochastic volatility

    model is a good candidate for the pricing of VIX futures. While incorporating

    jumps into the underlying price can further improve the pricing of VIX futures,

    adding jumps to the volatility process appears to contribute little improvement for

    pricing VIX futures. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:166–190,

    2012

Publication Date


  • 2012

Citation


  • Zhu, S. & Lian, G. (2012). An analytical formula for VIX futures and its applications. Journal of Futures Markets, 32 (2), 166-190.

Scopus Eid


  • 2-s2.0-83055176778

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/1991

Has Global Citation Frequency


Number Of Pages


  • 24

Start Page


  • 166

End Page


  • 190

Volume


  • 32

Issue


  • 2

Place Of Publication


  • United States