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VIX derivatives, hedging and vol-of-vol risk

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journal contribution
posted on 2023-06-09, 19:42 authored by Andreas KaeckAndreas Kaeck, Norman J Seeger
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.

History

Publication status

  • Published

File Version

  • Accepted version

Journal

European Journal of Operational Research

ISSN

0377-2217

Publisher

Elsevier

Issue

2

Volume

283

Page range

767-782

Department affiliated with

  • Accounting and Finance Publications

Research groups affiliated with

  • Quantitative International Finance Network Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2019-11-19

First Open Access (FOA) Date

2021-11-20

First Compliant Deposit (FCD) Date

2019-11-19

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