Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5083336 | International Review of Economics & Finance | 2016 | 19 Pages |
Abstract
The fair value of VIX futures is derived by pricing the forward 30-day volatility which underlies the volatility risk of S&P 500 in the 30Â days after the futures expiration. While forward implied volatility can also be traded with forward-start strangles, this study demonstrates that VIX futures could offer more effective volatility-risk hedge for an investor who has a short position on the S&P 500 futures call option. In particular, the delta-vega-neutral hedging strategy incorporating stochastic volatility on average outperforms in out-of-sample hedging. Adding price jumps further enhances the hedging performance during the crash period.
Related Topics
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Economics and Econometrics
Authors
Yueh-Neng Lin, Anchor Y. Lin,