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1 results

  • Pricing VIX derivatives using a stochastic volatility model with a flexible jump structure

  • Wuyi Ye, Bin Wu, Pengzhan Chen
  • Journal:
    Probability in the Engineering and Informational Sciences / Volume 37 / Issue 1 / January 2023
    Published online by Cambridge University Press:
    27 January 2022, pp. 245-274
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  • This paper proposes a novel stochastic volatility model with a flexible jump structure. This model allows both contemporaneous and independent arrival of jumps in return and volatility. Moreover, time-varying jump intensities are used to capture jump clustering. In the proposed framework, we provide a semi-analytical solution for the pricing problem of VIX futures and options. Through numerical experiments, we verify the accuracy of our pricing formula and explore the impact of the jump structure on the pricing of VIX derivatives. We find that the correct identification of the market jump structure is crucial for pricing VIX derivatives, and misspecified model setting can yield large errors in pricing.