Stochastic volatility models and the pricing of VIX options

Authors

Joanna Goard, University of WollongongFollow
Mathew Mazur, University Of Wollongong

RIS ID

79595

Publication Details

Goard, J. & Mazur, M. (2013). Stochastic volatility models and the pricing of VIX options. Mathematical Finance, 23 (3), 439-458.

Abstract

In this paper we examine and compare the performance of a variety of continuous- time volatility models in their ability to capture the behaviour of the VIX. The `3/2- model' with a di®usion structure which allows the volatility of volatility changes to be highly sensitive to the actual level of volatility is found to outperform all other popular models tested. Analytic solutions for option prices on the VIX under the 3/2- model are developed and then used to calibrate at-the-money market option prices.