Review of Quantitative Finance and Accounting

, Volume 35, Issue 3, pp 245–269 | Cite as

A jump diffusion model for VIX volatility options and futures

  • Dimitris Psychoyios
  • George Dotsis
  • Raphael N. Markellos
Original Research


Volatility indices are becoming increasingly popular as a measure of market uncertainty and as a new asset class for developing derivative instruments. Although jumps are widely considered as a salient feature of volatility, their implications for pricing volatility options and futures are not yet fully understood. This paper provides evidence indicating that the time series behaviour of the VIX index is well approximated by a mean reverting logarithmic diffusion with jumps. This process is capable of capturing stylized facts of VIX dynamics such as fast mean-reversion at higher levels, level effects of volatility and large upward movements during times of market stress. Based on the empirical results, we provide closed-form valuation models for European options written on the spot and forward VIX, respectively.


Implied volatility Jump diffusion Option pricing Volatility risk 

JEL Classification

G13 C51 C52 


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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  • Dimitris Psychoyios
    • 1
    • 2
  • George Dotsis
    • 3
  • Raphael N. Markellos
    • 4
    • 5
  1. 1.Department of Industrial ManagementUniversity of PiraeusPiraeusGreece
  2. 2.CAIR, Manchester Business SchoolUniversity of ManchesterManchesterUK
  3. 3.Essex Business School and Essex Finance CentreUniversity of EssexColchesterUK
  4. 4.Department of Management Science and TechnologyAthens University of Economics and BusinessAthensGreece
  5. 5.Centre for Research in International Economics and Finance (CIFER)Loughborough UniversityLoughboroughUK

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