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|Title: ||The Market for Volatility Trading; VIX Futures|
|Authors: ||Brenner, Menachem|
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.|
|Appears in Collections:||Finance Working Papers|
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