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Department of Applied Finance and Actuarial Studies

Dr Guanghua Andy Lian Seminar

Research Seminars - business and economics
  • Topic: An analytical formula for VIX futures and its applications
  • Speaker: Dr Guanghua Andy Lian, Lecturer in Applied Mathematics , Auckland University of Technology, New Zealand.
  • Venue:E4A 623
  • When: 14th December, 2011, (Wed)
  • Time: 4-5pm

This is a joint seminar with the Macquarie University Centre for Financial Risk.

In this paper we present a closed-form, exact solution for the pricing of VIX futures in a stochastic volatility model with simultaneous jumps in both the asset price and volatility processes. The newly-derived formula is then used to show that the well-known convexity correction approximations can sometimes lead to large errors. Utilizing the newly-derived formula, we also conduct an empirical study, the results of which demonstrate that the Heston stochastic volatility model is a good candidate for the pricing of VIX futures. While incorporating jumps into the underlying price can further improve the pricing of VIX futures, adding jumps to the volatility process appears to contribute little improvement for pricing VIX futures.

This is joint work with Song-Ping Zhu.


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