VIX futures and its closed‐form pricing through an affine GARCH model with realized variance

This paper studies the forecasting of volatility index (VIX) and the pricing of its futures by a generalized affine realized volatility model proposed by Christoffersen et al. This model is a weighted average of a GARCH and a pure realized variance (RV) model that incorporates each volatility compon...

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Bibliographic Details
Published in:The journal of futures markets 2021-01, Vol.41 (1), p.135-156
Main Authors: Wang, Qi, Wang, Zerong
Format: Article
Language:English
Subjects:
Analysis
Forecasting
Futures
Pricing
realized volatility
Stochastic models
VIX futures pricing
Volatility
volatility extraction
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Summary:This paper studies the forecasting of volatility index (VIX) and the pricing of its futures by a generalized affine realized volatility model proposed by Christoffersen et al. This model is a weighted average of a GARCH and a pure realized variance (RV) model that incorporates each volatility component into the new dynamics. We rewrite the VIX in terms of both volatility components and then derive closed‐form formulas for the VIX forecasting and its futures pricing. Our empirical studies find that a unification of the GARCH and the RV in the modeling substantially improves the forecasting of this index and the pricing of its futures.
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.22159