Valuation of Vix Derivatives

Abstract

The Working Paper Series seeks to disseminate original research in economics and fi nance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment.The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem.The Banco de España disseminates its main reports and most of its publications via the INTERNET at the following website: http://www.bde.es.Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

Dynamic Index Tracking and Risk Exposure Control Using Derivatives

“…These models were first applied to pricing volatility futures and options by Grübichler and Longstaff (1996) and Mencía and Sentana (2013), among others. We expand their analysis to understand the tracking performance of VIX derivatives portfolios and VIX ETFs.…”

“…In particular, our methodology and examples shed light on the connection between the mean-reverting behavior of VIX and the implications to the pricing of VIX derivatives and tracking this index and its associated factors. We consider the tracking and risk exposure control problems under the Cox-Ingersoll-Ross (CIR) model (see Cox et al (1985); Grübichler and Longstaff (1996)), as well as the Concatenated Square Root (CSQR) model (see Mencía and Sentana (2013)). Among our new findings, we derive the trading strategies using options or futures to track the VIX or achieve any exposure to the index and/or its factor (see Sections 4.1 and 4.3).…”

“…The CIR process has also been used to model the volatility index due to their common meanreverting property (see Grübichler and Longstaff (1996) and Mencía and Sentana (2013), among others). Suppose there exist a futures on the market index S as well as a futures on the volatility index Y , and consider a dynamic portfolio of these two futures contracts.…”

Trading VIX futures under mean reversion with regime switching

“…Later Dotsis et al (2007) add jumps to a CIR diffusion. However, studies of Mencía and Sentana (2013) and Sircar and Papanicolaou (2014) show that VIX implied volatility data can be better reproduced by incorporating regime switching. display two characteristically different term structures observed in the VIX futures market.…”

Constructing Equity Market–Neutral VIX Portfolios with Dynamic CAPM

“…The VIX Index itself is not tradable, but the CBOE began trading futures contracts on the VIX on Since the introduction of VIX futures, various VIX-related instruments have been formulated (see Alexander and Korovilas [2013]). Researchers and practitioners have become increasingly interested in VIX derivatives in terms of their use in both (1) volatility selling (see Carr and Wu [2009]; Rhoads [2011]; Sinclair [2013]) and (2) portfolio protection strategies (Dash and Moran [2005]; Chen, Chung, and Ho [2011]; Mencía and Sentana [2013]). …”