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Stochastic volatility models and the pricing of VIX options

Journal Article


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Abstract


  • In this paper we examine and compare the performance of a variety of continuous-

    time volatility models in their ability to capture the behaviour of the VIX. The `3/2-

    model' with a diĀ®usion 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.

Publication Date


  • 2013

Citation


  • Goard, J. & Mazur, M. (2013). Stochastic volatility models and the pricing of VIX options. Mathematical Finance, 23 (3), 439-458.

Scopus Eid


  • 2-s2.0-84878959261

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=2196&context=eispapers

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/1187

Number Of Pages


  • 19

Start Page


  • 439

End Page


  • 458

Volume


  • 23

Issue


  • 3

Abstract


  • In this paper we examine and compare the performance of a variety of continuous-

    time volatility models in their ability to capture the behaviour of the VIX. The `3/2-

    model' with a diĀ®usion 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.

Publication Date


  • 2013

Citation


  • Goard, J. & Mazur, M. (2013). Stochastic volatility models and the pricing of VIX options. Mathematical Finance, 23 (3), 439-458.

Scopus Eid


  • 2-s2.0-84878959261

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=2196&context=eispapers

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/1187

Number Of Pages


  • 19

Start Page


  • 439

End Page


  • 458

Volume


  • 23

Issue


  • 3