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Volatility products have become popular in the past 15 years as a hedge against market uncertainty. In particular, there is growing interest in options on the VIX volatility index. A number of recent empirical studies examine whether there is significantly greater risk premium in VIX option prices compared with S&P 500 option prices. We address this issue by proposing and analyzing a stochastic volatility model with regime switching. The basic Heston model cannot capture VIX implieddoi:10.1080/14697688.2013.814923 fatcat:yofc3u4rlnc5ll5evoyhwlzuti