Valuation of VIX and target volatility options with affine GARCH models. Issue 12 (1st September 2020)

• Record Type: Journal Article
• Authors: Cao, Hongkai; Badescu, Alexandru; Cui, Zhenyu; Jayaraman, Sarath Kumar
• Is Part Of: Journal of futures markets. Volume 40:Issue 12(2020)
• Page Start: 1880
• Page End: 1917
• Publication Date: 2020-09-01
• Subjects: Heston‐Nandi GARCH model -- inverse gaussian model -- joint calibration -- target volatility options -- VIX options; Commodity exchanges -- Periodicals; Foreign exchange futures -- Periodicals; 332.632
• DOI: 10.1002/fut.22157
• Languages: English
• ISSNs: 0270-7314

Abstract

Abstract: In this paper we propose semiclosed‐form solutions, subject to an inversion of the Fourier transform, for the price of VIX options and target volatility options under affine GARCH models based on Gaussian and Inverse Gaussian distributions. We illustrate the advantage of the proposed analytic expressions by comparing them with those obtained from benchmark Monte–Carlo simulations. The empirical performance of the two affine GARCH models is tested using different calibration exercises based on historical returns and market quotes on VIX and SPX options.