Rough VIX Model Cuts Option Pricing MSE by 13% in Volatility Research Paper
chaumian · x · 2026-11-07
A new quantitative finance paper (arXiv:2611.07120) by Tianfeng Yang, Wen Su, and Blanka Horvath proposes the Rough Instantaneous Squared VIX (RISVIX) model, introducing fractional memory into the conventional Markovian framework.
- Derives an explicit VIX term-structure representation governed by Mittag-Leffler decay and a semi-closed-form VIX option pricing formula via an affine Fourier-Laplace transform
- Supports a two-step calibration: estimate memory, mean reversion, and initial states from term-structure indices, then calibrate remaining parameters to option prices
- Validated on daily data from Jan 2018 to Jun 2025: outperforms the Markovian benchmark in fitting the term structure, with larger gains in high-volatility periods; out-of-sample pricing reduces MSE by 13.06% and MAE by 6.33%, strongest at short maturities and high-VIX states
Takeaway: fractional-memory gains are most pronounced when volatility is elevated, within a tractable direct model of VIX derivatives.
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