The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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The Price of Higher Order Catastrophe Insurance: The Case of VIX Options
Published: 09/27/2022 | DOI: 10.1111/jofi.13182
BJØRN ERAKER, AOXIANG YANG
We develop a tractable equilibrium pricing model to explain observed characteristics in equity returns, VIX futures, S&P 500 options, and VIX options data based on affine jump‐diffusive state dynamics and representative agents endowed with Duffie‐Epstein recursive preferences. Our calibrated model replicates consumption, dividends, and asset market data, including VIX futures returns, the average implied volatilities in SPX and VIX options, and first‐ and higher‐order moments of VIX options returns. We document a time variation in the shape of VIX‐option‐implied volatility and a time‐varying hedging relationship between VIX and SPX options that our model both captures.