✦ LIBER ✦

A simplified pricing model for volatility futures

✍ Scribed by Brice Dupoyet; Robert T. Daigler; Zhiyao Chen

Publisher: John Wiley and Sons
Year: 2011
Tongue: English
Weight: 204 KB
Volume: 31
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20471

No coin nor oath required. For personal study only.

✦ Synopsis

We develop a general model to price VIX futures contracts. The model is adapted to test both the constant elasticity of variance (CEV) and the Cox-Ingersoll-Ross formulations, with and without jumps. Empirical tests on VIX futures prices provide out-of-sample estimates within 2% of the actual futures price for almost all futures maturities. We show that although jumps are present in the data, the models with jumps do not typically outperform the others; in particular, we demonstrate the important benefits of the CEV feature in pricing futures contracts. We conclude by examining errors in the model relative to the VIX characteristics.

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