hilss
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| Total Posts: 70 |
| Joined: Jun 2007 |
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This might be too simplistic, and i'm sure there's a flaw in my logic, but I would like your feedback please.
I'm trying to use ES options to produce the VIX futures prices.
1) I fit the ES option prices (I should using SPX by definition, but don't have access to SPX) via a vol model.
2) I use the vol model to produce the variance swap price.
3) Now I have a variance swap term structure (expiration x-axis and total variance on y-axis).
4) Since I don't have the Wednesday expiration, I interpolate the total variance and produce the 30-day forward variance (starting on the VIX expiration date).
5) I convert this to annualize vol.
when I do this, I constantly underestimate the VIX future prices.
Many thanks,
hilss
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kloc
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| Total Posts: 43 |
| Joined: May 2017 |
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This is never going to work - VIX futures are *expectation* of future VIX. Remember: E(sqrt(Variance)) != sqrt(E(Variance)).
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hilss
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| Total Posts: 70 |
| Joined: Jun 2007 |
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| Thanks Kloc !!! Would it be safe to assume that this would be ok to compute forward variance? |
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kloc
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| Total Posts: 43 |
| Joined: May 2017 |
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You mean get market expectation of fwd variance as a forward starting var swap? Yes, variances are additive, you can use this approach for fwd variances.
However, same caveats apply like like in the case of pricing var swaps via underlying option portfolios... |
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hilss
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| Total Posts: 70 |
| Joined: Jun 2007 |
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understood... makes sense.
thank you very much
hilss |
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The VIX futures price should be above the SPX vol forward vol swap price but below the forward var swap price (which you made).
It's possible that either you have a calculation error, perhaps the wrong forward price, interest rates, or a bad options model.
It is also possible that the VIX futures are breaking the upper arb bounds, as they do that from time to time, especially the front month.
Either way, this stuff is honestly a nightmare. |
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