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An analytical formula for VIX futures and its applications

โœ Scribed by Zhu, Song Ping (author);Lian, Guang Hua (author)

Publisher
John Wiley and Sons
Year
2011
Tongue
English
Weight
312 KB
Volume
32
Category
Article
ISSN
0270-7314

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โœฆ Synopsis

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.

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