Does the Vix Jump? Implications for Pricing and Hedging Volatility Risk
نویسندگان
چکیده
Implied volatility indices are becoming increasingly popular as a measure of market uncertainty and as a vehicle for developing derivative instruments to hedge against unexpected changes in volatility. Although jumps are widely considered as a salient feature of volatility, their implications for volatility options and futures are not yet fully understood. This paper provides evidence indicating that the empirical behavior of the VIX equity implied volatility index over a period of 10 years is well approximated by a square root mean reverting process with jumps. By augmenting the popular Longstaff and Grunbichler (1996) option pricing model, we show that incorrectly omitting jumps may cause considerable problems to pricing and hedging. JEL Classification: G13, C51, C52
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