Pricing VIX futures with mixed frequency macroeconomic information

Abstract

This paper develops a new mixed frequency macro affine stochastic volatility (MacroSV) model and presents a closed-form formula for pricing VIX futures. In our model, the variance is decomposed into long-run and short-run components and the long-run component is driven by the macroeconomic variables. The result from the Monte Carlo experiment shows that the new model outperforms the benchmark model in terms of VIX futures pricing. The results of MacroSV-type models suggest that there is a significant relationship between the volatility and macroeconomic variables. The in-sample forecast results indicate that the models with mixed frequency macroeconomic information outperform the benchmark Heston model. For the out-of-sample pricing, the MacroSV model with the economic information of PPI for the United States has an improvement of 16% over the Heston model.