Pure jump models for pricing and hedging VIX derivatives

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• 作者：Jing Li^a ; ^{cuhklijing@gmail.com} ; Lingfei Li^b ; ^{lfli@se.cuhk.edu.hk} ; Gongqiu Zhang^b ; ^{gqzhang@se.cuhk.edu.hk}
• 关键词：VIX derivatives ; 3/2 diffusion ; Time change ; Pure jump ; Infinite activity ; Option pricing ; Hedging ; Eigenfunction expansions
• 刊名：Journal of Economic Dynamics and Control
• 出版年：2017
• 出版时间：January 2017
• 年：2017
• 卷：74
• 期：Complete
• 页码：28-55
• 全文大小：748 K
• 卷排序：74

文摘

Recent non-parametric statistical analysis of high-frequency VIX data (Todorov and Tauchen, 2011) reveals that VIX dynamics is a pure jump semimartingale with infinite jump activity and infinite variation. To our best knowledge, existing models in the literature for pricing and hedging VIX derivatives do not have these features. This paper fills this gap by developing a novel class of parsimonious pure jump models with such features for VIX based on the additive time change technique proposed in 28 and 29. We time change the 3/2 diffusion by a class of additive subordinators with infinite activity, yielding pure jump Markov semimartingales with infinite activity and infinite variation. These processes have time and state dependent jumps that are mean reverting and are able to capture stylized features of VIX. Our models take the initial term structure of VIX futures as input and are analytically tractable for pricing VIX futures and European options via eigenfunction expansions. Through calibration exercises, we show that our model is able to achieve excellent fit for the VIX implied volatility surface which typically exhibits very steep skews. Comparison to two other models in terms of calibration reveals that our model performs better both in-sample and out-of-sample. We explain the ability of our model to fit the volatility surface by evaluating the matching of moments implied from market VIX option prices. To hedge VIX options, we develop a dynamic strategy which minimizes instantaneous jump risk at each rebalancing time while controlling transaction cost. Its effectiveness is demonstrated through a simulation study on hedging Bermudan style VIX options.