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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.
Appears in Collections:Finance Working Papers

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