Pricing Of Volatility Index Options Under The 3/2 Model

The volatility index(VIX)reflects investors' expectations of future market volatility.As an important forward-looking indicator of financial markets,the volatility index quantifies market sentiment.Since the birth of the VIX,a series of financial derivatives with the VIX as the target were launched in the mature market,among which the futures and options of the VIX of the stock market were the most widely used.When the markets are falling,investors' demand for safety increases and the implied volatility of options will rise,so the VIX is negatively correlated with most financial assets.Thus adding VIX derivatives to your portfolio can be a good hedge against risk.Since CBOE launched the world's first volatility index derivatives in 2004,the world's financial mature markets have launched their own volatility index derivatives.Therefore,the study on the pricing of volatility index derivatives is an inevitable direction of academic research.This paper based on the precious studies,summarizes seven stochastic volatility models and discusses the PDE and analytical solutions of options for the 3/2 model.Using the data of sse 50 ETF which are from Feb.2019 to Mar.2020 to calculate the option prices under the3/2 model and the Black-Scholes model.Then we define the absolute root-mean-square pricing error and relative root-mean-square pricingerror with the observation data to discuss the stability and accuracy of the models.