Empirical Model of VIX Volatility and SPX Variance

Empirical Model of VIX Volatility and SPX Variance | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Empirical Model of VIX Volatility and SPX Variance Peter Lee This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-4490690/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract We introduce a toy model for VIX futures dynamics using the Shifted-Lognormal (SLN) model which does an excellent job of fitting VIX option prices with only two parameters. Then using the results of Roger Lee who studied SLN models in detail, we propose a way to extrapolate VIX volatility surface which by construction is arbitrage free. Then, we derive analytical formula for forward variance in this model and relate risks of VIX volatility surface with that of SPX volatility surface by matching variance swaps results from both markets. This allows one to relate risk parameters between VIX and SPX volatility surface, namely we derive a nonlinear equation that relates VIX skew and SPX skew. This can be used for cross market hedging, arbitrage and enhanced risk monitoring. VIX derivatives SPX volatility Full Text Additional Declarations The authors declare no competing interests. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. 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