On smile properties of volatility derivatives: understanding the VIX skew

DOI10.1137/19M1269981zbMATH Open1483.91227arXiv1808.03610OpenAlexW4205306299MaRDI QIDQ5029932FDOQ5029932

Authors: David García Lorite, Aitor González, Elisa Alòs 

Publication date: 15 February 2022

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: We develop a method to study the implied volatility for exotic options and volatility derivatives with European payoffs such as VIX options. Our approach, based on Malliavin calculus techniques, allows us to describe the properties of the at-the-money implied volatility (ATMI) in terms of the Malliavin derivatives of the underlying process. More precisely, we study the short-time behaviour of the ATMI level and skew. As an application, we describe the short-term behavior of the ATMI of VIX and realized variance options in terms of the Hurst parameter of the model, and most importantly we describe the class of volatility processes that generate a positive skew for the VIX implied volatility. In addition, we find that our ATMI asymptotic formulae perform very well even for large maturities. Several numerical examples are provided to support our theoretical results.

Full work available at URL: https://arxiv.org/abs/1808.03610

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zbMATH Keywords

Malliavin calculusfractional Brownian motionimplied volatilitystochastic volatility modelsVIXvariance optionsrough volatility

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic calculus of variations and the Malliavin calculus (60H07) Fractional processes, including fractional Brownian motion (60G22) Financial applications of other theories (91G80)

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Cited In (13)

• Empirical analysis of rough and classical stochastic volatility models to the SPX and VIX markets
• On the Implied Volatility of Asian Options Under Stochastic Volatility Models
• Volatility smile as relativistic effect
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• Option implied VIX, skew and kurtosis term structures
• A volatility smile-based uncertainty index
• VIX pricing in the rBergomi model under a regime switching change of measure
• Weak approximations and VIX option price expansions in forward variance curve models
• Power law in Sandwiched Volterra Volatility model
• Volatility and volatility-linked derivatives: estimation, modeling, and pricing
• The rough Hawkes Heston stochastic volatility model
• The short-time behavior of VIX-implied volatilities in a multifactor stochastic volatility framework
• The VIX Future in Bergomi Models: Fast Approximation Formulas and Joint Calibration with S&P 500 Skew

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