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Variance Term Structure And Vix Futures Pricing

Author

Listed:
  • YINGZI ZHU

    (Department of International Trade and Finance, School of Economics and Management, Tsinghua University, Beijing 100084, China)

  • JIN E. ZHANG

    (School of Business and School of Economics and Finance, The University of Hong Kong, Pokfulam Road, Hong Kong, China)

Abstract

Using no arbitrage principle, we derive a relation between the drift term of risk-neutral dynamics for instantaneous variance and the term structure of forward variance. We show that the forward variance curve can be derived from options market. Based on the variance term structure, we derive a no arbitrage pricing model for VIX futures pricing. The model is the first no arbitrage model combining options market and VIX futures market. The model can be easily generalized to price other volatility derivatives.

Suggested Citation

  • Yingzi Zhu & Jin E. Zhang, 2007. "Variance Term Structure And Vix Futures Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 111-127.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:01:n:s0219024907004123
    DOI: 10.1142/S0219024907004123
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