A regime switching quadratic model for VIX futures valuation Online publication date: Wed, 09-Dec-2015
by Zhigang Tong
International Journal of Financial Markets and Derivatives (IJFMD), Vol. 4, No. 3/4, 2015
Abstract: We develop a continuous time model for the VIX futures valuation. In this model, the state variable follows a mean-reverting process and the logarithm of future price is a quadratic function of state variable with regime switching mean. The transition between regimes is governed by a continuous time Markov chain. We provide analytical solutions for future prices and show how the regime shifts and the nonlinearity introduced by the quadratic term affect the term structure of future prices. We estimate both single regime and regime switching models through the Kalman filter. In our empirical work, we document that, indeed, the regime switching quadratic model can improve the forecasting power of the existing models.
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Financial Markets and Derivatives (IJFMD):
Login with your Inderscience username and password:
Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.
If you still need assistance, please email subs@inderscience.com