Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/309779 
Authors: 
Year of Publication: 
2022
Citation: 
[Journal:] Review of Derivatives Research [ISSN:] 1573-7144 [Volume:] 25 [Issue:] 3 [Publisher:] Springer US [Place:] New York, NY [Year:] 2022 [Pages:] 315-339
Publisher: 
Springer US, New York, NY
Abstract: 
We show that the VIX Index structurally underestimates model-free implied volatility because its implementation omits extrapolation of the volatility smile in the tails. We use the asymptotic behavior of the volatility surface to construct a correction term that is model-independent and only requires option prices at the two outermost strikes. We show how to apply this correction to the VIX Index ex-post as well as how to modify its implementation accordingly. Furthermore, we show that the degree of underestimation varies over time. For the S&P 500 Index and the DJIA Index the error is larger in periods of sustained low volatility. This cannot be observed for the Volatility-of-VIX Index.
Subjects: 
Model-free implied volatility
Volatility smile
VIX index
Variance swaps
JEL: 
G10
G12
G13
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.