Hedging Strategy Comparisons of Volatility Index Options Using Diffusion Models

With the innovation of derivatives, the Standard and Poor's (S&P) 500 index -- as an underlying asset of the volatility index (VIX) introduced by the Chicago Board Options Exchange (CBOE) -- was adopted as the research subject in this study. Since the financial crisis of 2008, the degree of market volatility has increased substantially. In addition, a random process has been found jumping about in the VIX data. In this study we compare VIX options based on different diffusion models. In this study, when a jump component is considered in the VIX process, the expectation maximization (EM) method is used to estimate parameters; this is a different perspective of evaluation from other studies. This paper further analyzes different hedging strategies based on different diffusion models