Inversion of Convex Ordering: Local Volatility Does Not Maximize the Price of VIX Futures

Understand

It has often been stated that, within the class of continuous stochastic volatility models calibrated to vanillas, the price of a VIX future is maximized by the Dupire local volatility model.

• In this article we prove that this statement is incorrect: we build a continuous stochastic volatility model in which a VIX future is strictly more expensive than in its associated local volatility model.
• More generally, in this model, strictly convex payoffs on a squared VIX are strictly cheaper than in the associated local volatility model.
• This corresponds to an inversion of convex ordering between local and stochastic variances, when moving from instantaneous variances to squared VIX, as convex payoffs on instantaneous variances are always cheaper in the local volatility model.