A dimension‐invariant cascade model for VIX futures. Issue 10 (21st July 2019)

• Record Type: Journal Article
• Authors: Wang, Zhiguang; Dupoyet, Brice
• Is Part Of: Journal of futures markets. Volume 39:Issue 10(2019)
• Page Start: 1214
• Page End: 1227
• Publication Date: 2019-07-21
• Subjects: cascade -- dimension‐invariant -- term structure -- VIX futures; Commodity exchanges -- Periodicals; Foreign exchange futures -- Periodicals; 332.632
• DOI: 10.1002/fut.22042
• Languages: English
• ISSNs: 0270-7314

Abstract

Abstract: We propose a new stochastic volatility model by allowing for a cascading structure of volatility components. The model, under a minor assumption, allows us to add as many components as desired with no additional parameters, effectively defeating the curse of dimensionality often encountered in traditional models. We derive a semi‐closed‐form solution to the VIX futures price, and find that our six‐factor model with only six parameters can closely fit spot VIX and VIX futures prices from 2004 to 2015 and produce out‐of‐sample pricing errors of magnitudes similar to those of in‐sample errors.