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The term structure of the VXX option smirk: Pricing VXX option with a two‐factor model and asymmetry jumps

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  • Xiaoyu Tan
  • Chengxiang Wang
  • Wei Lin
  • Jin E. Zhang
  • Shenghong Li
  • Xuejun Zhao
  • Zili Zhang

Abstract

This paper proposes a comprehensive jump‐to‐default extended two‐factor stochastic volatility plus asymmetry jumps model for the valuation of VXX derivatives. The model provides a more flexible modeling of the time variation in VXX options smirk and VXX options volatility term structure compared with previous model alternatives. Empirical results indicate that our model outperforms Bao et al.'s model by 28.19% in‐sample and 23.38% out‐of‐sample. Moreover, our model improves the probability that the estimated prices fall inside the quoted option bid‐ask spread and has a better fitting capacity for the term structure of VXX implied volatility, especially for out‐of‐the‐money options.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jfutmk:v:41:y:2021:i:4:p:439-457
    DOI: 10.1002/fut.22182
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    References listed on IDEAS

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    Cited by:

    1. Feng, Ling & Wang, Jieyu, 2023. "Random sources correlations and carbon futures pricing," International Review of Financial Analysis, Elsevier, vol. 86(C).
    2. Wei Lin & Jin E. Zhang, 2022. "Pricing VXX options by modeling VIX directly," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 888-922, May.
    3. Jiling Cao & Xinfeng Ruan & Shu Su & Wenjun Zhang, 2021. "Specification analysis of VXX option pricing models under Lévy processes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(9), pages 1456-1477, September.

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