Department of Economics and Business Economics

A Non-Structural Investigation of VIX Risk Neutral Density

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A Non-Structural Investigation of VIX Risk Neutral Density. / Barletta, Andrea; de Magistris, Paolo Santucci; Violante, Francesco.

In: Journal of Banking & Finance, Vol. 99, 2019, p. 1-20.

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

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Barletta, Andrea ; de Magistris, Paolo Santucci ; Violante, Francesco. / A Non-Structural Investigation of VIX Risk Neutral Density. In: Journal of Banking & Finance. 2019 ; Vol. 99. pp. 1-20.

Bibtex

@article{ca486cfb3b0e435c80f18d2d6c9f7194,
title = "A Non-Structural Investigation of VIX Risk Neutral Density",
abstract = "We propose a non-structural method to retrieve the risk-neutral density (RND) implied by options on the CBOE Volatility Index (VIX). The methodology is based on orthogonal polynomial expansions around a kernel density and yields the RND of the underlying asset without the need for a parametric specification. The classic family of Laguerre expansions is extended to include the GIG and the generalized Weibull kernels. We show that orthogonal polynomial expansions yield accurate approximations of the RND of VIX and, in some cases, they outperform commonly used non-parametric methods. Based on a panel of observed VIX options, we retrieve the variance swap term structure, the time series of VVIX, the VIX risk-neutral moments and the Volatility-at-Risk, which reveal a number of stylized facts on the RND of VIX.",
keywords = "VIX options, Orthogonal expansions, Risk-neutral moments, Volatility jumps, Volatility tail-risk",
author = "Andrea Barletta and {de Magistris}, {Paolo Santucci} and Francesco Violante",
year = "2019",
doi = "10.1016/j.jbankfin.2018.11.012",
language = "English",
volume = "99",
pages = "1--20",
journal = "Journal of Banking & Finance",
issn = "0378-4266",
publisher = "Elsevier BV",

}

RIS

TY - JOUR

T1 - A Non-Structural Investigation of VIX Risk Neutral Density

AU - Barletta, Andrea

AU - de Magistris, Paolo Santucci

AU - Violante, Francesco

PY - 2019

Y1 - 2019

N2 - We propose a non-structural method to retrieve the risk-neutral density (RND) implied by options on the CBOE Volatility Index (VIX). The methodology is based on orthogonal polynomial expansions around a kernel density and yields the RND of the underlying asset without the need for a parametric specification. The classic family of Laguerre expansions is extended to include the GIG and the generalized Weibull kernels. We show that orthogonal polynomial expansions yield accurate approximations of the RND of VIX and, in some cases, they outperform commonly used non-parametric methods. Based on a panel of observed VIX options, we retrieve the variance swap term structure, the time series of VVIX, the VIX risk-neutral moments and the Volatility-at-Risk, which reveal a number of stylized facts on the RND of VIX.

AB - We propose a non-structural method to retrieve the risk-neutral density (RND) implied by options on the CBOE Volatility Index (VIX). The methodology is based on orthogonal polynomial expansions around a kernel density and yields the RND of the underlying asset without the need for a parametric specification. The classic family of Laguerre expansions is extended to include the GIG and the generalized Weibull kernels. We show that orthogonal polynomial expansions yield accurate approximations of the RND of VIX and, in some cases, they outperform commonly used non-parametric methods. Based on a panel of observed VIX options, we retrieve the variance swap term structure, the time series of VVIX, the VIX risk-neutral moments and the Volatility-at-Risk, which reveal a number of stylized facts on the RND of VIX.

KW - VIX options

KW - Orthogonal expansions

KW - Risk-neutral moments

KW - Volatility jumps

KW - Volatility tail-risk

U2 - 10.1016/j.jbankfin.2018.11.012

DO - 10.1016/j.jbankfin.2018.11.012

M3 - Journal article

VL - 99

SP - 1

EP - 20

JO - Journal of Banking & Finance

JF - Journal of Banking & Finance

SN - 0378-4266

ER -