The VIX Index and its derivatives
Details
- Authors: Kia Farokhnia
- Title: The VIX Index and its derivatives
- Supervisior: Prof. Dr. Jörg Osterrieder
- Degree: Bachelor of Science
- University: Zurich University of Applied Sciences
- Year: 2021
- Status: Working Paper
Summary
Empirical data analysis of the VIX Index and its microstructure (VIX Spot, SP500 Options, VIX futures, and VIX Options) with descriptive statistics.
Abstract
The CBOE Volatility Index, known by the acronym VIX, is a common measurement method of expected stock market volatility published by the Chicago Board Options Exchange and is calculated using options on the SP500 Index. It is also known as the Fear Index by market participants. The current value of the VIX index indicates the expected annualized change in the SP500 index over the next 30 days, calculated based on options pricing theory and current options market data. We take a look at how the microstructure of the VIX market and its derivatives behave, using descriptive statistics by utilizing empirical analysis of the VIX and its derivatives. The analysis helps to understand the interaction and puts the index’s unique calculation methodology into perspective. We show a significant negative correlation of the VIX Index with its futures once the Spots moves outside its mean-reverting level. This interplay might explain visible discrepancies in our replication approach of the index with its futures. The futures movements fail to track the VIX Spot properly as the futures appear to not react quickly enough to movements in the VIX Spot, as seen in our regression analysis of the spread between futures and spot relative the VIX Spot itself. These characteristics lead to suboptimal effectiveness in tracking the VIX index with VIX futures alone. Options on the VIX are particularly suited to study market disruptions. When stock prices decline, the VIX usually increases drastically. We extract the VIX options data over the sample period of 2018. We analyze the time-series behavior over multiple months. We also examine sensitivity and ordinary least square regression analysis during particular short periods, notably before, at, and after settlement. To our knowledge, this is the first comprehensive descriptive analysis of the VIX index and its derivatives based on empirical observations.
Important links
Data
- End-of-Day Option Quotes (SP500, VIX)
- 60 seconds Option Quotes (SP500)
- 15 seconds Spot (VIX)
- End-of-Day Future Quotes (VIX)
- 5 minutes Future Quotes (VIX)
Data source: Chicago Board Options Exchange Datashop