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Pricing VIX options with volatility clustering

Author

Listed:
  • Bo Jing
  • Shenghong Li
  • Yong Ma

Abstract

We investigate the valuation of volatility index (VIX) options by developing a model with a self‐exciting Hawkes process that allows for clustering in the VIX. In the proposed framework, we find semianalytical expressions for the characteristic function and forward characteristic function, and then we solve the pricing problem of standard‐start and forward‐start options via the fast Fourier transform. The empirical results provide evidence to support the significance of accounting for volatility clustering when pricing VIX options.

Suggested Citation

  • Bo Jing & Shenghong Li & Yong Ma, 2020. "Pricing VIX options with volatility clustering," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(6), pages 928-944, June.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:6:p:928-944
    DOI: 10.1002/fut.22092
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    Cited by:

    1. Chen Tong & Zhuo Huang & Tianyi Wang, 2022. "Do VIX futures contribute to the valuation of VIX options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(9), pages 1644-1664, September.
    2. Chen Tong & Zhuo Huang, 2021. "Pricing VIX options with realized volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(8), pages 1180-1200, August.
    3. Xiaoyu Tan & Chengxiang Wang & Wei Lin & Jin E. Zhang & Shenghong Li & Xuejun Zhao & Zili Zhang, 2021. "The term structure of the VXX option smirk: Pricing VXX option with a two‐factor model and asymmetry jumps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(4), pages 439-457, April.
    4. Qiang Liu & Yuhan Jiao & Shuxin Guo, 2022. "GARCH pricing and hedging of VIX options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(6), pages 1039-1066, June.

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