An empirical comparison of continuous-time models of implied volatility indices

Dotsis, George; Psychoyios, Dimitris; Skiadopoulos, George

doi:10.1016/j.jbankfin.2007.01.011

Cited by 105 publications

(85 citation statements)

References 53 publications

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“…Jumps in volatility may also be important for modeling equity index 2 Dotsis et al (2007) point out that this feature is only of second order importance as the best performing model in their study is a Merton-type jump process without a mean-reversion component. Modeling volatility with this process over a long-time horizon is however problematic as in this model volatility tends to either zero or infinity in the long run.…”

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confidence: 99%

Continuous-time VIX dynamics: On the role of stochastic volatility of volatility

Kaeck

Alexander

2013

International Review of Financial Analysis

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confidence: 99%

Continuous-time VIX dynamics: On the role of stochastic volatility of volatility

Kaeck

Alexander

2013

International Review of Financial Analysis

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“…In line with the research of Chan et al [9] and Dotsis et al [10], we study the ability of different popular diffusion continuous-time models to analyse the dynamics of the EUA spot prices. It is necessary for the regulator to explore the dynamics to choose an appropriate pricing model and design a new trading scheme.…”

Section: Dynamics Of Emissions Allowance Spot Pricesmentioning

confidence: 87%

Stochastic Differential Equation Models for the Price of European CO2 Emissions Allowances

Cai

Pan

2017

Sustainability

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Abstract:Understanding the stochastic nature of emissions allowances is crucial for risk management in emissions trading markets. In this study, we discuss the emissions allowances spot price within the European Union Emissions Trading Scheme: Powernext and European Climate Exchange. To compare the fitness of five stochastic differential equations (SDEs) to the European Union allowances spot price, we apply regression theory to obtain the point and interval estimations for the parameters of the SDEs. An empirical evaluation demonstrates that the mean reverting square root process (MRSRP) has the best fitness of five SDEs to forecast the spot price. To reduce the degree of smog, we develop a new trading scheme in which firms have to hand many more allowances to the government when they emit one unit of air pollution on heavy pollution days, versus one allowance on clean days. Thus, we set up the SDE MRSRP model with Markovian switching to analyse the evolution of the spot price in such a scheme. The analysis shows that the allowances spot price will not jump too much in the new scheme. The findings of this study could contribute to developing a new type of emissions trading.

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“…Testing against actual market prices will provide more definitive evidence on the merit of alternative pricing models. In the case of futures this is possible since some data do exist for futures on volatility indices (e.g., see Dotsis et al, 2007).…”

Section: Discussionmentioning

confidence: 99%

“…However, they adopted the rather restrictive assumption that the volatility jump size is constant rather than being random. Finally, Dotsis et al (2007) examined the ability of alternative popular continuous-time diffusion and jump diffusion processes to capture the dynamics of eight major European and U.S. volatility indices. They found that the best models in terms of fitting were those with random upward and downward jumps.…”

Section: Introductionmentioning

confidence: 99%

A jump diffusion model for VIX volatility options and futures

Psychoyios

Dotsis

Markellos

2009

Rev Quant Finan Acc

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Implied volatility indices are becoming increasingly popular as a measure of market uncertainty and as a vehicle for developing derivative instruments to hedge against unexpected changes in volatility. Although jumps are widely considered as a salient feature of volatility, their implications for pricing implied volatility options and futures are not yet fully understood. This paper provides evidence indicating that the time series behavior of the VIX equity implied volatility index is well approximated by a mean reverting logarithmic diffusion with jumps. This process is capable of capturing stylized facts of VIX dynamics such as fast mean-reversion at high levels, level effects of volatility and large upward movements during times of market stress.Based on this process, we develop closed form valuation models for volatility futures and options and show that incorrectly omitting jumps may cause considerable problems to pricing and hedging.a Lecturer (Corresponding author), Manchester Accounting

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An empirical comparison of continuous-time models of implied volatility indices

Cited by 105 publications

References 53 publications

Continuous-time VIX dynamics: On the role of stochastic volatility of volatility

Continuous-time VIX dynamics: On the role of stochastic volatility of volatility

Stochastic Differential Equation Models for the Price of European CO2 Emissions Allowances

A jump diffusion model for VIX volatility options and futures

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