IDEAS home Printed from https://ideas.repec.org/a/wly/jfutmk/v38y2018i8p977-995.html
   My bibliography  Save this article

Consistency between S&P500 and VIX derivatives: Insights from model‐free VIX futures pricing

Author

Listed:
  • Hendrik Hülsbusch
  • Alexander Kraftschik

Abstract

This paper studies the interdependencies between the VIX futures market and the S&P500 and VIX options markets using a model‐free pricing method for VIX futures. We show that the replication strategy for the VIX futures greatly deviates from observed prices. Limited strike ranges do not suffice to explain these deviations, whereas the options’ bid–ask spreads can explain most of it. After controlling for the spreads, we find a lead–lag structure between markets segmented by product, not by its underlying. If options markets imply higher volatility risks than VIX futures, options prices in both markets adjust and vice versa.

Suggested Citation

  • Hendrik Hülsbusch & Alexander Kraftschik, 2018. "Consistency between S&P500 and VIX derivatives: Insights from model‐free VIX futures pricing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(8), pages 977-995, August.
    • Handle: RePEc:wly:jfutmk:v:38:y:2018:i:8:p:977-995
    DOI: 10.1002/fut.21919
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/fut.21919
    Download Restriction: no
    File URL: https://libkey.io/10.1002/fut.21919?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Carr, Peter & Wu, Liuren, 2007. "Stochastic skew in currency options," Journal of Financial Economics, Elsevier, vol. 86(1), pages 213-247, October.
    2. Bardgett, Chris & Gourier, Elise & Leippold, Markus, 2019. "Inferring volatility dynamics and risk premia from the S&P 500 and VIX markets," Journal of Financial Economics, Elsevier, vol. 131(3), pages 593-618.
    3. Gupta, Anurag & Subrahmanyam, Marti G., 2000. "An empirical examination of the convexity bias in the pricing of interest rate swaps," Journal of Financial Economics, Elsevier, vol. 55(2), pages 239-279, February.
    4. John Y. Campbell & Glen B. Taksler, 2003. "Equity Volatility and Corporate Bond Yields," Journal of Finance, American Finance Association, vol. 58(6), pages 2321-2350, December.
    5. repec:bla:jfinan:v:59:y:2004:i:3:p:1367-1404 is not listed on IDEAS
    6. Gurdip Bakshi & Nikunj Kapadia & Dilip Madan, 2003. "Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options," The Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 101-143.
    7. P. Carr & D. Madan, 2001. "Optimal positioning in derivative securities," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 19-37.
    8. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
    9. Park, Yang-Ho, 2016. "The effects of asymmetric volatility and jumps on the pricing of VIX derivatives," Journal of Econometrics, Elsevier, vol. 192(1), pages 313-328.
    10. John M Griffin & Amin Shams, 2018. "Manipulation in the VIX?," The Review of Financial Studies, Society for Financial Studies, vol. 31(4), pages 1377-1417.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Karamfil Todorov, 2021. "Passive funds affect prices: evidence from the most ETF-dominated asset classes," BIS Working Papers 952, Bank for International Settlements.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Boswijk, H. Peter & Laeven, Roger J.A. & Vladimirov, Evgenii, 2024. "Estimating option pricing models using a characteristic function-based linear state space representation," Journal of Econometrics, Elsevier, vol. 244(1).
    2. Jiling Cao & Xinfeng Ruan & Wenjun Zhang, 2020. "Inferring information from the S&P 500, CBOE VIX, and CBOE SKEW indices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(6), pages 945-973, June.
    3. Kaeck, Andreas & Seeger, Norman J., 2020. "VIX derivatives, hedging and vol-of-vol risk," European Journal of Operational Research, Elsevier, vol. 283(2), pages 767-782.
    4. Peixuan Yuan, 2022. "Time-Varying Skew in VIX Derivatives Pricing," Management Science, INFORMS, vol. 68(10), pages 7761-7791, October.
    5. Christoffersen, Peter & Jacobs, Kris & Chang, Bo Young, 2013. "Forecasting with Option-Implied Information," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 581-656, Elsevier.
    6. Park, Yang-Ho, 2016. "The effects of asymmetric volatility and jumps on the pricing of VIX derivatives," Journal of Econometrics, Elsevier, vol. 192(1), pages 313-328.
    7. Li, Zhenxiong & Yao, Xingzhi & Izzeldin, Marwan, 2023. "On the right jump tail inferred from the VIX market," International Review of Financial Analysis, Elsevier, vol. 86(C).
    8. Tai‐Yong Roh & Alireza Tourani‐Rad & Yahua Xu & Yang Zhao, 2021. "Volatility‐of‐volatility risk in the crude oil market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(2), pages 245-265, February.
    9. Brignone, Riccardo & Gonzato, Luca & Lütkebohmert, Eva, 2023. "Efficient Quasi-Bayesian Estimation of Affine Option Pricing Models Using Risk-Neutral Cumulants," Journal of Banking & Finance, Elsevier, vol. 148(C).
    10. Evgenii Vladimirov, 2023. "iCOS: Option-Implied COS Method," Papers 2309.00943, arXiv.org, revised Feb 2024.
    11. Matthias Held & Marcel Omachel, 2014. "Up- and Downside Variance Risk Premia in Global Equity Markets," FEMM Working Papers 140009, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    12. Xinglin Yang & Ji Chen, 2021. "VIX term structure: The role of jump propagation risks," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(6), pages 785-810, June.
    13. Bjørn Eraker & Aoxiang Yang, 2022. "The Price of Higher Order Catastrophe Insurance: The Case of VIX Options," Journal of Finance, American Finance Association, vol. 77(6), pages 3289-3337, December.
    14. Branger, Nicole & Muck, Matthias, 2012. "Keep on smiling? The pricing of Quanto options when all covariances are stochastic," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1577-1591.
    15. Pakorn Aschakulporn & Jin E. Zhang, 2022. "Bakshi, Kapadia, and Madan (2003) risk-neutral moment estimators: A Gram–Charlier density approach," Review of Derivatives Research, Springer, vol. 25(3), pages 233-281, October.
    16. Manuel Ammann & Mathis Mörke, 2019. "Credit Variance Risk Premiums," Working Papers on Finance 1908, University of St. Gallen, School of Finance.
    17. Wong, Patrick, 2023. "Explaining intraday crude oil returns with higher order risk-neutral moments," Journal of Commodity Markets, Elsevier, vol. 31(C).
    18. Bollerslev, Tim & Todorov, Viktor, 2023. "The jump leverage risk premium," Journal of Financial Economics, Elsevier, vol. 150(3).
    19. Pakorn Aschakulporn & Jin E. Zhang, 2022. "Bakshi, Kapadia, and Madan (2003) risk‐neutral moment estimators: An affine jump‐diffusion approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(3), pages 365-388, March.
    20. Zhe Li, 2020. "Equity Option Pricing with Systematic and Idiosyncratic Volatility and Jump Risks," JRFM, MDPI, vol. 13(1), pages 1-18, January.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jfutmk:v:38:y:2018:i:8:p:977-995. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0270-7314/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.