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Date
2011-12Type
- Working Paper
ETH Bibliography
yes
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Abstract
Following a trend of sustained and accelerated growth, the VIX futures and options market has become a closely followed, active and liquid market. The standard stochastic volatility models --which focus on the modeling of instantaneous variance -- are unable to fit the entire term structure of VIX futures as well as the entire VIX options surface. In contrast, we propose to model directly the VIX index, in a mean-reverting local volatility-of-volatility model, which will provide a global fit to the VIX market. We then show how to construct the local volatility-of-volatility surface by adapting the ideas in Carr (2008) and Andreasen, Huge (2010) to a mean-reverting process. Show more
Publication status
publishedJournal / series
NCCR Finrisk Working PaperVolume
Publisher
National Centre of Competence in Research (NCCR); Financial Valuation and Risk Management (FINRISK)Subject
VIX futures; VIX options; volatility of volatility; volatility derivativesOrganisational unit
03658 - Schweizer, Martin / Schweizer, Martin
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ETH Bibliography
yes
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