We examine the volatility-volume relation in futures markets using volume data categorized by type of trader. We find that the positive volatility-volume relation is driven by the general public, a group of traders who are distant from the trading f loor and therefore without precise information on order f low. Clearing members and f loor traders who observe order f low often decrease volatility. Our findings are consistent with Shalen's~1993! hypothesis that uninformed traders who cannot differentiate liquidity demand from fundamental value change increase volatility.* Florida International University and Florida Atlantic University, respectively. We thank the reviewer and the editor, René Stulz, for insightful comments and suggestions concerning the concepts and exposition of this article. We also thank
We examine the pricing performance of VIX option models. Such models possess a wide-range of underlying characteristics regarding the behavior of both the S&P500 index and the underlying VIX. Our tests employ three representative models for VIX options: Whaley (1993), Grunbichler and Longstaff (1996), Carr and Lee (2007), Lin and Chang (2009), who test four stochastic volatility models, as well as to previous simulation results of VIX option models. We find that no model has small pricing errors over the entire range of strike prices and times to expiration. In particular, out-of-the-money VIX options are difficult to price, with Grunbichler and Longstaff 's mean-reverting model producing the smallest dollar errors in this category. Whaley's Black-like option model produces the best results for in-the-money VIX options. However, the Whaley model does under/overprice out-of-the-money call/put VIX options, which is opposite the behavior of stock index option pricing models. VIX options exhibit a volatility skew opposite the skew of index options.
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