Pricing VIX options with stochastic skew and asymmetric jumps

This paper performs several empirical exercises to provide evidence that the stochastic skew behavior and asymmetric jumps exist in VIX markets. In order to adequately capture all of the features, we develop a general valuation model and obtain quasi-analytical solutions for pricing VIX options. In addition, we make comparative studies of alternative models to illustrate the effects after taking into account these features on the valuation of VIX options and investigate the relative value of an additional volatility factor and jump components. The empirical results indicate that the multi-factor volatility structure is vital to VIX option pricing due to providing more flexibility in the modeling of VIX dynamics, and the need for asymmetric jumps cannot be eliminated by an additional volatility factor.