Bounds for VIX Futures Given S&P 500 Smiles by Julien Guyon

Event Date: 

Monday, October 10, 2016 -
3:30pm to 5:00pm

Event Date Details: 

Refreshments served at 3:15 p.m

Event Location: 

  • South Hall 5607F

Julien Guyon — Bloomberg NY 

Title: Bounds for VIX Futures Given S&P 500 Smiles

Abstract: We derive sharp bounds for the prices of VIX futures using the full information of S&P 500 smiles. To that end, we formulate the model-free sub/superreplication of the VIX by trading in the S&P 500 and its vanilla options as well as the forward-starting log-contracts. A dual problem of minimizing/maximizing certain risk-neutral expectations is introduced and shown to yield the same value. The classical bounds for VIX futures given the smiles only use a calendar spread of log-contracts on the S&P 500. We analyze for which smiles the classical bounds are sharp and how they can be improved when they are not. In particular, we introduce a tractable family of functionally generated portfolios which often improves the classical spread while still being tractable, more precisely, determined by a single concave/convex function on the line. Numerical experiments on market data and SABR smiles show that the classical lower bound can be improved dramatically, whereas the upper bound is often close to optimal.

Bio: Julien Guyon is a senior quantitative analyst in the Quantitative Research group at Bloomberg L.P., New York. He is also an adjunct professor in the Department of Mathematics at Columbia University and at the Courant Institute of Mathematical Sciences, NYU. Before joining Bloomberg, Julien worked in the Global Markets Quantitative Research team at Societe Generale in Paris for six years (2006-2012), and was an adjunct professor at Universite Paris 7 and Ecole des ponts. He co-authored the book Nonlinear Option Pricing (Chapman & Hall, CRC Financial Mathematics Series, 2014) with Pierre Henry-Labordere. His main research interests include nonlinear option pricing, volatility and correlation modeling, and numerical probabilistic methods. Julien holds a Ph.D. in Probability Theory and Statistics from Ecole des ponts. He graduated from Ecole Polytechnique (Paris), Universite Paris 6, and Ecole des ponts. A big soccer fan, Julien has also developed a strong interest in sports analytics, and has published several articles on the FIFA World Cup, the UEFA Champions League, and the UEFA Euro in top-tier newspapers such as The New York Times, Le Monde, and El Pais, including a new, fairer draw method for the FIFA World Cup.