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Article: A remark on Lin and Chang's paper 'Consistent modeling of S&P 500 and VIX derivatives'

TitleA remark on Lin and Chang's paper 'Consistent modeling of S&P 500 and VIX derivatives'
Authors
KeywordsAffine jump diffusion
Characteristic function
VIX option pricing
Issue Date2012
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jedc
Citation
Journal Of Economic Dynamics And Control, 2012, v. 36 n. 5, p. 708-715 How to Cite?
AbstractLin and Chang (2009, 2010) establish a VIX futures and option pricing theory when modeling S&P 500 index by using a stochastic volatility process with asset return and volatility jumps. In this note, we prove that Lin and Chang's formula is not an exact solution of their pricing equation. More generally, we show that the characteristic function of their pricing equation cannot be exponentially affine, as proposed by them. Furthermore, their formula cannot serve as a reasonable approximation. Using the (Heston, 1993) model as a special case, we demonstrate that Lin and Chang formula misprices VIX futures and options in general and the error can become substantially large. © 2012 Elsevier B.V..
Persistent Identifierhttp://hdl.handle.net/10722/145961
ISSN
2015 Impact Factor: 0.879
2015 SCImago Journal Rankings: 0.937
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorCheng, Jen_HK
dc.contributor.authorIbraimi, Men_HK
dc.contributor.authorLeippold, Men_HK
dc.contributor.authorZhang, JEen_HK
dc.date.accessioned2012-03-27T09:04:07Z-
dc.date.available2012-03-27T09:04:07Z-
dc.date.issued2012en_HK
dc.identifier.citationJournal Of Economic Dynamics And Control, 2012, v. 36 n. 5, p. 708-715en_HK
dc.identifier.issn0165-1889en_HK
dc.identifier.urihttp://hdl.handle.net/10722/145961-
dc.description.abstractLin and Chang (2009, 2010) establish a VIX futures and option pricing theory when modeling S&P 500 index by using a stochastic volatility process with asset return and volatility jumps. In this note, we prove that Lin and Chang's formula is not an exact solution of their pricing equation. More generally, we show that the characteristic function of their pricing equation cannot be exponentially affine, as proposed by them. Furthermore, their formula cannot serve as a reasonable approximation. Using the (Heston, 1993) model as a special case, we demonstrate that Lin and Chang formula misprices VIX futures and options in general and the error can become substantially large. © 2012 Elsevier B.V..en_HK
dc.languageengen_US
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jedcen_HK
dc.relation.ispartofJournal of Economic Dynamics and Controlen_HK
dc.subjectAffine jump diffusionen_HK
dc.subjectCharacteristic functionen_HK
dc.subjectVIX option pricingen_HK
dc.titleA remark on Lin and Chang's paper 'Consistent modeling of S&P 500 and VIX derivatives'en_HK
dc.typeArticleen_HK
dc.identifier.emailZhang, JE: jinzhang@hku.hken_HK
dc.identifier.authorityZhang, JE=rp01125en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.jedc.2012.01.002en_HK
dc.identifier.scopuseid_2-s2.0-84862779307en_HK
dc.identifier.hkuros199035en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-84862779307&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume36en_HK
dc.identifier.issue5en_HK
dc.identifier.spage708en_HK
dc.identifier.epage715en_HK
dc.identifier.isiWOS:000302422900002-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridCheng, J=7405940469en_HK
dc.identifier.scopusauthoridIbraimi, M=55261692200en_HK
dc.identifier.scopusauthoridLeippold, M=6506162004en_HK
dc.identifier.scopusauthoridZhang, JE=7601346659en_HK
dc.identifier.citeulike10252741-

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