Risk premium for futures on the VIX-squared under the Eraker-Wu (2017) model

• Autor(a) principal: Damásio, André Filipe Assunção
• Data de Publicação: 2023
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/30477
• topic: Índice VIX -- VIX index; VIX-squared; Futures; Volatilidade -- Volatility; Premium; Índice Standard and Poor's -- S&P 500; Risk management; VIX-quadrado; Futuros; Prémio -- Award; Gestão do risco

This dissertation has as its main objective to explore and analyze in detail the two-factor model proposed by Eraker and Wu (2017) in different financial contexts. Initially, we show the model and its equilibrium specification under physical measure. We detail the full specification of the model, including the stochastic processes that are involved, and represent the equations in matricial notation to facilitate the analysis. Moreover, we study affine transformations, which allow us to simplify and better understand of the model. That said, we extend our analysis to consider the same two-factor model, but now under the risk-neutral measure. We then introduce stochastic discount factor concept, that is fundamental to evaluate financial assets, when working on risk-neutral measure. Again, the model specification is detailed under this measure, keeping a rigorous approach and affine transforms are proposed to simplify the analysis. Later, we focus our attention in the premium associated with futures contracts of the VIX (-squared) index, an important concept as far as the volatility market is concerned. Using equations and results derived on previous chapters, we explore in depth some underlying fundamentals to this premium, being the main one, to prove that these contracts have negative expected values and how they can be applied in risk management and investment strategies.