Worcester Polytechnic Institute Electronic Theses and Dissertations Collection

Title page for ETD etd-121611-122959

Document Typethesis
Author NameCarr, Justin P
TitleModeling Volatility Derivatives
DepartmentMathematical Sciences
  • Marcel Blais, Advisor
  • Keywords
  • Modeling Volatility Derivatives
  • Date of Presentation/Defense2011-12-16
    Availability unrestricted


    The VIX was introduced in 1993 by the CBOE and has been commonly referred to as the fear gauge due to decreases in market sentiment leading market participants to purchase protection from declining asset prices. As market sentiment improves, declines in the VIX are generally observed. In reality the VIX measures the markets expectations about future volatility with asset prices either rising or falling in value. With the VIX gaining popularity in the marketplace a proliferation of derivative products has emerged allowing investors to trade volatility. In observance of the behavior of the VIX we attempt to model the derivative VXX as a mean reverting process via the Ornstein-Uhlenbeck stochastic differential equation. We extend this analysis by calibrating VIX options with observed market prices in order to extract the market density function. Using these parameters as the diffusion process in our Ornstein-Uhlenbeck model we derive futures prices on the VIX which serves to value our target derivative VXX.

  • JustinCarr.pdf

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