On the Theoretical Valuation of V-KOSPI 200 Futures

Abstract

Although the V-KOSPI 200 Futures markets opened in November 2014, trading has not been active until recently. One of the reasons for the illiquidity is due to the lack of a market consensus on the stochastic process model for the underlying volatility index (V-KOSPI 200). Given this fact, there is no theoretical pricing model that can be used for the determination of the benchmark price for the V-KOSPI 200 Futures. In this paper, we use the generalized method of moments method to search for a model that fits well with the time series of V-KOSPI 200 under the historical measure. In addition, we compare the performance of each model for the pricing of the V-KOSPI 200 Futures under the risk neutral measure. In the empirical analysis, we find that the CEV (constant elasticity of variance) parameter with the value about 1.5 is needed to price both the underlying V-KOSPI 200 process (under the physical measure) and the V-KOSPI 200 Futures (under the risk neutral measure). We also find that the mean reversion property is necessary to explain the dynamics of V-KOSPI 200.

Citation

Eom, Y.H. and Jang, W.W. (2017), "On the Theoretical Valuation of V-KOSPI 200 Futures", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 25 No. 3, pp. 405-424. https://doi.org/10.1108/JDQS-03-2017-B0004