Kaeck, A. and Seeger, \NormanJ.\ (2020). VIX derivatives, hedging and vol-of-vol risk European Journal of Operational Research, 283(2):767--782.
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Affiliated author
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Publication year2020
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JournalEuropean Journal of Operational Research
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.