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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