Analysis of VIX Markets with a Time-Spread Portfolio

Research output: Contribution to journalArticle

Abstract

This paper explores the relationship between option markets for the S&P500 (SPX) and Chicago Board Options Exchange’s CBOE’s Volatility Index (VIX). Results are obtained by using the so-called time-spread portfolio to replicate a future contract on the squared VIX. The time-spread portfolio is interesting because it provides a model-free link between derivative prices for SPX and VIX. Time spreads can be computed from SPX put options with different maturities, which results in a term structure for squared volatility. This term structure can be compared to the VIX-squared term structure that is backed-out from VIX call options. The time-spread portfolio is also used to measure volatility-of-volatility (vol-of-vol) and the volatility leverage effect. There may emerge small differences in these measurements, depending on whether time spreads are computed with options on SPX or options on VIX. A study of 2012 daily options data shows that vol-of-vol estimates utilizing SPX data will reflect the volatility leverage effect, whereas estimates that exclusively utilize VIX options will predominantly reflect the premia in the VIX-future term structure.

Original languageEnglish (US)
Pages (from-to)374-408
Number of pages35
JournalApplied Mathematical Finance
Volume23
Issue number5
DOIs
StatePublished - Sep 2 2016

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Volatility
Derivatives
Term Structure
Leverage Effect
Market
Volatility index
Term structure
Estimate

Keywords

  • model-free pricing
  • static hedging
  • stochastic volatility
  • time-spread portfolio
  • VIX options

ASJC Scopus subject areas

  • Finance
  • Applied Mathematics

Cite this

Analysis of VIX Markets with a Time-Spread Portfolio. / Papanicolaou, Andrew.

In: Applied Mathematical Finance, Vol. 23, No. 5, 02.09.2016, p. 374-408.

Research output: Contribution to journalArticle

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