Abstract
We conduct a comprehensive study on the specifications of VXX option pricing models under Levy processes during the period from 2010 to 2017 based on in-sample and out-of-sample performance tests. Our empirical results imply that a jump component plays an important role in VXX option pricing. In particular, we find that infinite-activity jump models are superior to finite-activity jump models. More importantly, this paper corrects the VXX option pricing theory in the literature; that is the discounted VXX price should be a martingale under the risk-neutral measure as the VXX is an exchange-traded debt security.