Trading VIX Futures under Mean Reversion with Regime Switching (1605.07945v2)

Abstract: This paper studies the optimal VIX futures trading problems under a regime-switching model. We consider the VIX as mean reversion dynamics with dependence on the regime that switches among a finite number of states. For the trading strategies, we analyze the timings and sequences of the investor's market participation, which leads to several corresponding coupled system of variational inequalities. The numerical approach is developed to solve these optimal double stopping problems by using projected-successive-over-relaxation (PSOR) method with Crank-Nicolson scheme. We illustrate the optimal boundaries via numerical examples of two-state Markov chain model. In particular, we examine the impacts of transaction costs and regime-switching timings on the VIX futures trading strategies.