Construction of Volatility Indices Using a Multinomial Tree Approximation Method
An inter-disciplinary working group from Stevens comprising of, Professor Khaldoun Khashanah, Program Director, Financial Engineering, Ionut Florescu, Assistant Professor, Mathematics, Dragos Bozdog, PhD student Mathematics/Financial Engineering and Hongwei Qiu, a graduate of the MS-Financial Engineering program, paper, “Construction of Volatility Indices Using a Multinomial Tree Approximation Method,” is listed as one of the Top Ten downloads on the Social Science Research Network (SSRN).
This paper introduces a new methodology for an alternative calculation of market volatility index based on a multinomial tree approximation of a stochastic volatility model. The estimation was performed by constructing synthetic options with consistent properties. Several variants of this index was calculated and their performance was analyzed over the whole dataset and over a subset of data corresponding to particular market events. The proposed index is compared with the VIX produced by CBOE.
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The paper was first published in HANDBOOK OF MODELING HIGH-FREQUENCY DATA IN FINANCE in December 2011.