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Specification analysis of VXX option pricing models under Lévy processes

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  • Jiling Cao
  • Xinfeng Ruan
  • Shu Su
  • Wenjun Zhang

Abstract

We conduct a comprehensive study on the specifications of VXX option pricing models under Lévy processes during the period from 2010 to 2017 based on in‐sample and out‐of‐sample performance tests. Our empirical results imply that a jump component plays an important role in VXX option pricing. In particular, we find that infinite‐activity jump models are superior to finite‐activity jump models. More importantly, this paper corrects the VXX option pricing theory in the literature; that is the discounted VXX price should be a martingale under the risk‐neutral measure as the VXX is an exchange‐traded debt security.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jfutmk:v:41:y:2021:i:9:p:1456-1477
    DOI: 10.1002/fut.22218
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    References listed on IDEAS

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    Cited by:

    1. 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.

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