Kaeck, Andreas and Seeger, Norman J (2019) VIX derivatives, hedging and vol-of-vol risk. European Journal of Operational Research, 283 (2). pp. 767-782. ISSN 0377-2217

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Abstract

We study the empirical hedging performance of alternative VIX option pricing models. Recent advances in the literature find evidence of asymmetric volatility-of-volatility (similar to the leverage effect in equity markets), stochastic mean-reversion and jumps. Using such findings in our model framework, we show that while sophisticated models have superior pricing performance and can explain a range of stylized facts in the VIX derivatives market, their hedging performance is inferior to a simple Black model hedge. We also study the empirical performance of regime-dependent hedge ratio adjustments commonly applied in equity markets.

Item Type:	Article
Schools and Departments:	University of Sussex Business School > Accounting and Finance
Research Centres and Groups:	Quantitative International Finance Network
Subjects:	H Social Sciences > HG Finance H Social Sciences > HG Finance > HG0101 Theory. Method. Relation to other subjects H Social Sciences > HG Finance > HG0101 Theory. Method. Relation to other subjects > HG0106 Mathematical models
Depositing User:	Andreas Kaeck
Date Deposited:	19 Nov 2019 12:04
Last Modified:	20 Nov 2021 02:00
URI:	http://sro.sussex.ac.uk/id/eprint/88144

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