✦ LIBER ✦

The new market for volatility trading

✍ Scribed by Jin E. Zhang; Jinghong Shu; Menachem Brenner

Publisher: John Wiley and Sons
Year: 2010
Tongue: English
Weight: 478 KB
Volume: 30
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20448

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

This study analyses the new market for trading volatility; VIX futures. We first use market data to establish the relationship between VIX futures prices and the index itself. We observe that VIX futures and VIX are highly correlated; the term structure of average VIX futures prices is upward sloping, whereas the term structure of VIX futures volatility is downward sloping. To establish a theoretical relationship between VIX futures and VIX, we model the instantaneous variance using a simple square root mean‐reverting process with a stochastic long‐term mean level. Using daily calibrated long‐term mean and VIX, the model gives good predictions of VIX futures prices under normal market situation. These parameter estimates could be used to price VIX options. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 30:809–833, 2010

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