This workshop gave me the opportunity to get to know what is the state of the art of financial engineering in east Asia. I gave a seminar on a new method we developed to compute risk for VIX futures.
Title: Measuring market risk for VIX futures strategies
We describe a method to perform risk simulations of VIX futures and VIX-futures strategies, according to the historical-simulation model. We assume a stochastic-volatility mean-reverting constant-elasticity-of-variance process to model the VIX dynamics. Following non-arbitrage arguments the market expectation of VIX futures price results in a function of three financial variables: the spot VIX index, the long-term expected VIX value, and a time scale parameter. For each trading day in the period 2011-2012 we collect the closing VIX futures market quotes across all available maturities and calibrate the three financial variables using an ad-hoc least-squares procedure. We then compute historical scenarios for all financial variables and we apply these scenarios to single VIX futures and a calendar spread position. Finally, from the distribution of the simulated spread values we derive the profit-and-loss (P&L) strip used to compute risk figures.
Keywords: Risk management, risk measures, and volatility models