VSTOXX index futures can be used to hedge against economic uncertainty as the underlying tracks the expected 30day volatility of the EURO STOXX 50 equity index. Daniel Guterding investigates the effect of trader inventory on VSTOXX futures price through a combination of stochastic processes and machine learning methods. By assuming a simple Heston-type stochastic process for the underlying EURO STOXX 50 market, approximate analytical formulas for the implied volatility smile and the VSTOXX index have been derived. EURO STOXX 50 option implied volatilities and the VSTOXX index value are used to estimate the parameters of the model. Theoretical VSTOXX future prices are derived and compared to the actual market prices. While theoretical and market prices are usually in line, time periods are also observed, during which the market price does not agree with he assumed Heston model. A variety of market features that could potentially explain the price deviations is then collected and two machine learning models to the price difference are calibrated: a regularized linear model and a random forest. The findings are that both models indicate a strong influence of accumulated trader positions on the VSTOXX futures price.
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Myself
As an Investment Consultant and Specialist, Pompeo Pontone is a Professional Investor with 25 years’ experience in the fields of Investment Management and Quantitative Finance, with advanced expertise in Computer Science and Data Science.