VIX derivatives, hedging and vol-of-vol risk

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: 24 Jan 2020 15:15
URI: http://sro.sussex.ac.uk/id/eprint/88144

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