Consistent modelling of VIX and equity derivatives using a 3/2 plus jumps model
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Publication:4586033
Abstract: The paper demonstrates that a pure-diffusion 3/2 model is able to capture the observed upward-sloping implied volatility skew in VIX options. This observation contradicts a common perception in the literature that jumps are required for the consistent modelling of equity and VIX derivatives. The pure-diffusion model, however, struggles to reproduce the smile in the implied volatilities of short-term index options. One remedy to this problem is to augment the model by introducing jumps in the index. The resulting 3/2 plus jumps model turns out to be as tractable as its pure-diffusion counterpart when it comes to pricing equity, realized variance and VIX derivatives, but accurately captures the smile in implied volatilities of short-term index options.
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Cited in
(24)- Linking Vanillas and VIX Options: A Constrained Martingale Optimal Transport Problem
- The impact of jump distributions on the implied volatility of variance
- Regime-switching stochastic volatility model: estimation and calibration to VIX options
- Pricing exotic discrete variance swaps under the 3/2-stochastic volatility models
- A novel term-structure-based Heston model for implied volatility surface
- On smile properties of volatility derivatives: understanding the VIX skew
- Pricing timer options and variance derivatives with closed-form partial transform under the 3/2 model
- Extreme-strike comparisons and structural bounds for SPX and VIX options
- Volatility is (mostly) path-dependent
- Pure jump models for pricing and hedging VIX derivatives
- Dispersion-constrained martingale Schrödinger problems and the exact joint S\&P 500/VIX smile calibration puzzle
- Inversion of convex ordering in the VIX market
- Pricing VIX options in a 3/2 plus jumps model
- Consistent pricing of VIX and equity derivatives with the 4/2 stochastic volatility plus jumps model
- Pricing VIX derivatives with free stochastic volatility model
- Heston stochastic vol-of-vol model for joint calibration of VIX and S\&P 500 options
- Explicit implied volatilities for multifactor local-stochastic volatility models
- Consistent modeling of S\&P 500 and VIX derivatives
- Analysis of VIX markets with a time-spread portfolio
- Joint calibration to SPX and VIX options with signature-based models
- The VIX Future in Bergomi Models: Fast Approximation Formulas and Joint Calibration with S&P 500 Skew
- Joint modeling and calibration of SPX and VIX by optimal transport
- Pricing bounds for volatility derivatives via duality and least squares Monte Carlo
- Consistent time‐homogeneous modeling of SPX and VIX derivatives
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