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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26289

Title: The Market for Volatility Trading; VIX Futures
Authors: Brenner, Menachem
Shu, Jinghong
Zhang, Jin E.
Issue Date: May-2007
Series/Report no.: FIN-07-003
Abstract: This paper analyses the new market for trading volatility; VIX futures. We first use market data to establish the relationship between VIX futures prices and the index itself. We observe that VIX futures and VIX are highly correlated; the term structure of VIX futures price is upward sloping while the term structure of VIX futures volatility is downward sloping. To establish a theoretical relationship between VIX futures and VIX, we model the instantaneous variance using a simple square root mean-reverting process. Using daily calibrated variance parameters and VIX, the model gives good predictions of VIX futures prices. These parameter estimates could be used to price VIX options.
URI: http://hdl.handle.net/2451/26289
Appears in Collections:Finance Working Papers

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