Please use this identifier to cite or link to this item: http://arks.princeton.edu/ark:/88435/dsp01hq37vn68x
 Title: STOCHASTIC VOLATILITY MODELS FOR PRICING VIX OPTIONS CONSISTENT WITH VIX AND SPX IMPLIED VOLATILITIES: A SIMULATION APPROACH Authors: Cho, Woo-Hyung Advisors: Coulon, Michael Department: Operations Research and Financial Engineering Class Year: 2013 Abstract: This thesis examines and compares the performance of two stochastic volatility models – the Heston model and the 3/2-model – in their abilities to price VIX options accurately while capturing the VIX and SPX implied volatility characteristics consistently. Through a simulation study, we find that the 3/2-model outperforms the Heston model in its ability to capture upward sloping VIX option implied volatility curves. Calibration of parameters confirms that the 3/2- model reflects market dynamics fairly well, and that the addition of jumps on the underlying index could potentially reduce pricing error. We implement three new ideas to the Heston model in an attempt to improve its ability to price VIX options. Extent: 136 pages URI: http://arks.princeton.edu/ark:/88435/dsp01hq37vn68x Access Restrictions: Walk-in Access. This thesis can only be viewed on computer terminals at the Mudd Manuscript Library. Type of Material: Princeton University Senior Theses Language: en_US Appears in Collections: Operations Research and Financial Engineering, 2000-2016

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