Bounds for VIX futures given S{\&}P 500 smiles

DOI10.1007/S00780-017-0334-6zbMATH Open1422.91698arXiv1609.05832OpenAlexW2523334480MaRDI QIDQ2364530FDOQ2364530

Authors: Julien Guyon, Romain Menegaux, Marcel Nutz 

Publication date: 21 July 2017

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: We derive sharp bounds for the prices of VIX futures using the full information of S&P 500 smiles. To that end, we formulate the model-free sub/superreplication of the VIX by trading in the S&P 500 and its vanilla options as well as the forward-starting log-contracts. A dual problem of minimizing/maximizing certain risk-neutral expectations is introduced and shown to yield the same value. The classical bounds for VIX futures given the smiles only use a calendar spread of log-contracts on the S&P 500. We analyze for which smiles the classical bounds are sharp and how they can be improved when they are not. In particular, we introduce a family of functionally generated portfolios which often improves the classical bounds while still being tractable; more precisely, determined by a single concave/convex function on the line. Numerical experiments on market data and SABR smiles show that the classical lower bound can be improved dramatically, whereas the upper bound is often close to optimal.

Full work available at URL: https://arxiv.org/abs/1609.05832

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zbMATH Keywords

VIX futuresrobust hedgingmodel-free pricingprice bounds

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Martingales with discrete parameter (60G42) Portfolio theory (91G10) Linear optimal control problems (49N05)

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Cited In (9)

• Stability of the weak martingale optimal transport problem
• Dispersion-constrained martingale Schrödinger problems and the exact joint S\&P 500/VIX smile calibration puzzle
• An optimal transport-based characterization of convex order
• Applications of weak transport theory
• The VIX Future in Bergomi Models: Fast Approximation Formulas and Joint Calibration with S&P 500 Skew
• Stability of martingale optimal transport and weak optimal transport
• Pricing bounds for volatility derivatives via duality and least squares Monte Carlo
• A risk-neutral equilibrium leading to uncertain volatility pricing
• Volatility Options in Rough Volatility Models

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