{"title":"Pricing VIX derivatives with free stochastic volatility model","authors":"Wei Lin, Shenghong Li, Shane Chern, Jin E. Zhang","doi":"10.1007/s11147-018-9145-y","DOIUrl":null,"url":null,"abstract":"This paper aims to develop a new free stochastic volatility model, joint with jumps. By freeing the power parameter of instantaneous variance, this paper takes Heston model and 3/2 model for special examples, and extends the generalizability. This model is named after free stochastic volatility model, and it owns two distinctive features. First of all, the power parameter is not constrained, so as to enable the data to voice its authentic direction. The Generalized Methods of Moments suggest that the purpose of this newly-added parameter is to create various volatility fluctuations observed in financial market. Secondly, even upward and downward jumps are separately modeled to accommodate the market data, this paper still provides the quasi-closed-form solutions for futures and option prices. Consequently, the model is novel and highly tractable. Here, it should be noted that the data on VIX futures and corresponding option contracts is employed to evaluate the model, in terms of its pricing and implied volatility features capturing performance. To sum up, the free stochastic volatility model with asymmetric jumps is capable of adequately capturing the implied volatility dynamics. Thus, it can be regarded as a model advantageous in pricing VIX derivatives with fixed power volatility models.","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"225 1","pages":""},"PeriodicalIF":0.7000,"publicationDate":"2018-06-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"3","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Review of Derivatives Research","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.1007/s11147-018-9145-y","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 3
Abstract
This paper aims to develop a new free stochastic volatility model, joint with jumps. By freeing the power parameter of instantaneous variance, this paper takes Heston model and 3/2 model for special examples, and extends the generalizability. This model is named after free stochastic volatility model, and it owns two distinctive features. First of all, the power parameter is not constrained, so as to enable the data to voice its authentic direction. The Generalized Methods of Moments suggest that the purpose of this newly-added parameter is to create various volatility fluctuations observed in financial market. Secondly, even upward and downward jumps are separately modeled to accommodate the market data, this paper still provides the quasi-closed-form solutions for futures and option prices. Consequently, the model is novel and highly tractable. Here, it should be noted that the data on VIX futures and corresponding option contracts is employed to evaluate the model, in terms of its pricing and implied volatility features capturing performance. To sum up, the free stochastic volatility model with asymmetric jumps is capable of adequately capturing the implied volatility dynamics. Thus, it can be regarded as a model advantageous in pricing VIX derivatives with fixed power volatility models.
期刊介绍：
The proliferation of derivative assets during the past two decades is unprecedented. With this growth in derivatives comes the need for financial institutions, institutional investors, and corporations to use sophisticated quantitative techniques to take full advantage of the spectrum of these new financial instruments. Academic research has significantly contributed to our understanding of derivative assets and markets. The growth of derivative asset markets has been accompanied by a commensurate growth in the volume of scientific research. The Review of Derivatives Research provides an international forum for researchers involved in the general areas of derivative assets. The Review publishes high-quality articles dealing with the pricing and hedging of derivative assets on any underlying asset (commodity, interest rate, currency, equity, real estate, traded or non-traded, etc.). Specific topics include but are not limited to: econometric analyses of derivative markets (efficiency, anomalies, performance, etc.) analysis of swap markets market microstructure and volatility issues regulatory and taxation issues credit risk new areas of applications such as corporate finance (capital budgeting, debt innovations), international trade (tariffs and quotas), banking and insurance (embedded options, asset-liability management) risk-sharing issues and the design of optimal derivative securities risk management, management and control valuation and analysis of the options embedded in capital projects valuation and hedging of exotic options new areas for further development (i.e. natural resources, environmental economics. The Review has a double-blind refereeing process. In contrast to the delays in the decision making and publication processes of many current journals, the Review will provide authors with an initial decision within nine weeks of receipt of the manuscript and a goal of publication within six months after acceptance. Finally, a section of the journal is available for rapid publication on `hot'' issues in the market, small technical pieces, and timely essays related to pending legislation and policy. Officially cited as: Rev Deriv Res
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