Estimation of VIX futures through Gaussian factor models

Abstract

In this paper we investigate VIX dynamics through a two-factor Gaussian model, following Avellaneda and Papanicolaou (2019). Two strategies were adopted. First, we considered constant market price of risk. Second, we included time-varying market price of risk. In both cases, we estimated the model following two different approaches. In the first, we used a sample encompassing seven VIX future contracts and also the spot VIX. In the second, we dropped the spot VIX from the sample. We found that this removal provided a better adjustment between empirical and estimated data.