A Consistent Pricing Model for Index Options and Volatility Derivatives

Research output: Working paperResearch

Standard

A Consistent Pricing Model for Index Options and Volatility Derivatives. / Cont, Rama; Kokholm, Thomas.

Aarhus : Aarhus School of Business, Aarhus University, Department of Business Studies, 2009.

Research output: Working paperResearch

Harvard

Cont, R & Kokholm, T 2009 'A Consistent Pricing Model for Index Options and Volatility Derivatives' Aarhus School of Business, Aarhus University, Department of Business Studies, Aarhus.

APA

Cont, R., & Kokholm, T. (2009). A Consistent Pricing Model for Index Options and Volatility Derivatives. Aarhus: Aarhus School of Business, Aarhus University, Department of Business Studies.

CBE

Cont R, Kokholm T. 2009. A Consistent Pricing Model for Index Options and Volatility Derivatives. Aarhus: Aarhus School of Business, Aarhus University, Department of Business Studies.

MLA

Cont, Rama and Thomas Kokholm A Consistent Pricing Model for Index Options and Volatility Derivatives. Aarhus: Aarhus School of Business, Aarhus University, Department of Business Studies. 2009., 40 p.

Vancouver

Cont R, Kokholm T. A Consistent Pricing Model for Index Options and Volatility Derivatives. Aarhus: Aarhus School of Business, Aarhus University, Department of Business Studies. 2009.

Author

Cont, Rama ; Kokholm, Thomas. / A Consistent Pricing Model for Index Options and Volatility Derivatives. Aarhus : Aarhus School of Business, Aarhus University, Department of Business Studies, 2009.

Bibtex

@techreport{6a455b10a45111de8a84000ea68e967b,
title = "A Consistent Pricing Model for Index Options and Volatility Derivatives",
abstract = "We propose and study a flexible modeling framework for the joint dynamics of an index and a set of forward variance swap rates written on this index, allowing options on forward variance swaps and options on the underlying index to be priced consistently. Our model reproduces various empirically observed properties of variance swap dynamics and allows for jumps in volatility and returns. An affine specification using L´evy processes as building blocks leads to analytically tractable pricing formulas for options on variance swaps as well as efficient numerical methods for pricing of European options on the underlying asset. The model has the convenient feature of decoupling the vanilla skews from spot/volatility correlations and allowing for different conditional correlations in large and small spot/volatility moves.We show that our model can simultaneously fit prices of European options on S&P 500 across strikes and maturities as well as options on the VIX volatility index. The calibration of the model is done in two steps, first by matching VIX option prices and then by matching prices of options on the underlying.",
author = "Rama Cont and Thomas Kokholm",
year = "2009",
language = "English",
publisher = "Aarhus School of Business, Aarhus University, Department of Business Studies",
type = "WorkingPaper",
institution = "Aarhus School of Business, Aarhus University, Department of Business Studies",

}

RIS

TY - UNPB

T1 - A Consistent Pricing Model for Index Options and Volatility Derivatives

AU - Cont, Rama

AU - Kokholm, Thomas

PY - 2009

Y1 - 2009

N2 - We propose and study a flexible modeling framework for the joint dynamics of an index and a set of forward variance swap rates written on this index, allowing options on forward variance swaps and options on the underlying index to be priced consistently. Our model reproduces various empirically observed properties of variance swap dynamics and allows for jumps in volatility and returns. An affine specification using L´evy processes as building blocks leads to analytically tractable pricing formulas for options on variance swaps as well as efficient numerical methods for pricing of European options on the underlying asset. The model has the convenient feature of decoupling the vanilla skews from spot/volatility correlations and allowing for different conditional correlations in large and small spot/volatility moves.We show that our model can simultaneously fit prices of European options on S&P 500 across strikes and maturities as well as options on the VIX volatility index. The calibration of the model is done in two steps, first by matching VIX option prices and then by matching prices of options on the underlying.

AB - We propose and study a flexible modeling framework for the joint dynamics of an index and a set of forward variance swap rates written on this index, allowing options on forward variance swaps and options on the underlying index to be priced consistently. Our model reproduces various empirically observed properties of variance swap dynamics and allows for jumps in volatility and returns. An affine specification using L´evy processes as building blocks leads to analytically tractable pricing formulas for options on variance swaps as well as efficient numerical methods for pricing of European options on the underlying asset. The model has the convenient feature of decoupling the vanilla skews from spot/volatility correlations and allowing for different conditional correlations in large and small spot/volatility moves.We show that our model can simultaneously fit prices of European options on S&P 500 across strikes and maturities as well as options on the VIX volatility index. The calibration of the model is done in two steps, first by matching VIX option prices and then by matching prices of options on the underlying.

M3 - Working paper

BT - A Consistent Pricing Model for Index Options and Volatility Derivatives

PB - Aarhus School of Business, Aarhus University, Department of Business Studies

CY - Aarhus

ER -