Time-Varying Skew in VIX Derivatives Pricing

Peixuan Yuan*

*Corresponding author for this work

Research output: Contribution to journalJournal articlepeer-review

11 Citations (Scopus)

Abstract

This paper proposes a new reduced-form model for the pricing of VIX derivatives that includes an independent stochastic jump intensity factor and cojumps in the level and variance of VIX, while allowing the mean of VIX variance to be time varying. I fit the model to daily prices of futures and European options from April 2007 through December 2017. The empirical results indicate that the model significantly outperforms all other nested models and improves on benchmark by 21.6% in sample and 31.2% out of sample. The model more accurately portrays the tail behavior of VIX risk-neutral distribution for both short and long maturities, as it better captures the time-varying skew found to be largely independent of the level of the VIX smile.
Original languageEnglish
Pages (from-to)7761-7791
Number of pages31
JournalManagement Science
Volume68
Issue number10
Early online date29 Nov 2021
DOIs
Publication statusPublished - Oct 2022

Scopus Subject Areas

  • Strategy and Management
  • Management Science and Operations Research

User-Defined Keywords

  • VIX derivatives
  • cojumps
  • jump intensity
  • central tendency
  • implied volatility surface

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