Pricing VIX Options with Multifactor Stochastic Volatility

Download or read book Pricing VIX Options with Multifactor Stochastic Volatility written by Pascal Marco Caversaccio and published by . This book was released on 2016 with total page 71 pages. Available in PDF, EPUB and Kindle. Book excerpt: By exploiting the flexibility of the Wishart process, we propose an application of this framework to the pricing of Chicago Board Options Exchange (CBOE) volatility index (VIX) options. Our methodology is analytically tractable and yet flexible enough to efficiently price CBOE VIX options. In particular, the dynamics for the CBOE VIX is carried out in a linear affine way and the discounted Laplace transform exhibits an exponentially affine property. The tractable model structure lightens the computational burden and facilitates a fast identification of the parameter estimates. We empirically show that modeling the stochastic co-volatility factor can significantly improve the in-sample fitting results due to the improved modeling of higher conditional moments in the underlying transition probability density.