On smile properties of volatility derivatives: understanding the VIX skew

DOI10.1137/19M1269981MaRDI QIDQ5029932zbMATH OpenOpenAlexFDO

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)

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

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)

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.

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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
• scientific article; zbMATH DE number 2095958 (Why is no real title available?)
• Option implied VIX, skew and kurtosis term structures
• A volatility smile-based uncertainty index
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