Derivatives pricing when supply and demand matter: Evidence from the term structure of VIX futures

Abstract

We decompose the VIX futures term structure into systematic components driving the VIX and idiosyncratic components reflecting demand by various types of futures end‐users. We model two distinct channels by which trading activity manifests itself into futures prices: a contemporaneous “level effect” across the term structure due to the aggregate size of nondealer net demand and a mean‐reverting “roll effect” due to large trades in specific contracts. The observed futures term structure was, on average, higher and steeper than it would have been in the absence of the observed nondealer demand, but the impact varies in sign and magnitude over time.

The Law of One Price in Equity Volatility Markets

“…Similar to Garleanu et al (2009), Mixon and Onur (2019) find that demand for one VIX futures contract spills over to impact the prices of other contracts. The estimated demand effects in Mixon and Onur (2019) are quantitatively small, however, in comparison to the no-arbitrage bounds for VIX futures. This paper contributes to the literature by studying law of one price deviations across equity volatility markets.…”

“…Dong (2016) argues that VIX ETP demand impacts the prices of VIX futures through dealer hedging activity. Mixon and Onur (2019) provide a related study of demand pressure using regulatory data that includes dealer net positions by contract at a daily frequency. Similar to Garleanu et al (2009), Mixon and Onur (2019) find that demand for one VIX futures contract spills over to impact the prices of other contracts.…”

“…Mixon and Onur (2019) provide a related study of demand pressure using regulatory data that includes dealer net positions by contract at a daily frequency. Similar to Garleanu et al (2009), Mixon and Onur (2019) find that demand for one VIX futures contract spills over to impact the prices of other contracts. The estimated demand effects in Mixon and Onur (2019) are quantitatively small, however, in comparison to the no-arbitrage bounds for VIX futures.…”

Causality of price movements in VIX exchange-traded products and VIX futures contracts

“…(2015) demonstrate that equity volatility serves as a determinant of future Treasury term-structure volatility in terms of level and slope. Mixon et al . (2019) decompose the VIX Futures term structure into systematic and idiosyncratic components, finding that the observed futures term structure is on average, steeper due to non-dealer demand.…”