This paper is the first to use a state-preference pricing approach with BlackScholes analytic second derivatives to develop a forward-looking volatility index (FIX), as a forecast of the next 30-day market risk-neutral volatility. Using S&P 500 index (SPX) option prices from 1996 to 2010, we find that FIX is 99% correlated with the current CBOE volatility index (VIX) and it is a better estimato...

Abstract We focus on estimating daily integrated volatility ( IV ) by realized measures based intraday returns following a discrete-time stochastic model with pronounced periodicity (IP). demonstrate that neglecting the IP-impact estimators may lead to invalid statistical inference concerning for common finite number of returns. For given IP functional form, we analytically derive robust IP-cor...

Abstract We show that the realized GARCH model yields closed-form expression for both volatility index (VIX) and risk premium (VRP). The is driven by two shocks, a return shock shock, these are natural state variables in stochastic discount factor (SDF). endows exponentially affine SDF with compensation risk. This leads to dissimilar dynamic properties under physical risk-neutral measures can e...

We report on the adequacy of using Sato processes to value equity structured products. In models used to price options on realized variance, the latter must be a random variable with a positive variance. An analysis of this variance of realized variance for Sato processes shows that these processes may be suited to option contracts on realized volatility. Nonlinear pricing principles based on h...