Pricing VIX options in a stochastic vol‐of‐vol model |
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| Authors: | Chengxiang Wang Wenli Huang Shenghong Li Qunfang Bao |
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| Affiliation: | 1. Department of Mathematics, Zhejiang University, China;2. Chinese Academy of Financial Research, Zhejiang University of Finance and Economics, China;3. Union Bank of Switzerland, Shanghai, China |
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| Abstract: | This paper proposes and makes a study of a new model for volatility index option pricing. Factors such as mean‐reversion, jumps, and stochastic volatility are taken into consideration. In particular, the positive volatility skew is addressed by the jump and the stochastic volatility of volatility. Daily calibration is used to check whether the model fits market prices and generates positive volatility skews. Overall, the results show that the mean‐reverting logarithmic jump and stochastic volatility model (called MRLRJSV in the paper) serves as the best model in all the required aspects. Copyright © 2015 John Wiley & Sons, Ltd. |
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| Keywords: | pricing VIX option positive volatility skew stochastic vol‐of‐vol |
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