VIX derivatives, hedging and vol-of-vol risk

Andreas Kaeck, Norman J. Seeger*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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Abstract

We study the empirical hedging performance of alternative VIX option pricing models. Recent advances in the literature find evidence of asymmetric volatility-of-volatility (similar to the leverage effect in equity markets), stochastic mean-reversion and jumps. Using such findings in our model framework, we show that while sophisticated models have superior pricing performance and can explain a range of stylized facts in the VIX derivatives market, their hedging performance is inferior to a simple Black model hedge. We also study the empirical performance of regime-dependent hedge ratio adjustments commonly applied in equity markets.

Original languageEnglish
Pages (from-to)767-782
Number of pages16
JournalEuropean Journal of Operational Research
Volume283
Issue number2
Early online date21 Nov 2019
DOIs
Publication statusPublished - 1 Jun 2020

Keywords

  • Hedging performance
  • Risk management
  • Stochastic volatility of volatility
  • VIX options

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