Volatility Derivatives in Practice: Activity and Impact

Mixon, Scott; Onur, Esen

doi:10.2139/ssrn.2554745

“…Bollen and Whaley (2004) and Gârleanu, Pedersen, and Poteshman (2009) show that option prices are also affected by demand pressure. More directly related to this work, Mixon and Onur (2015) show that demand from asset managers puts upward pressure on VIX futures prices, and Cheng (2018) finds that a falling risk premium in VIX futures when risk rises is associated with a falling hedging demand. In addition, rebalancing demand arising from VIX-linked exchange-traded products (ETPs) can impose additional pressure in VIX futures market.…”

Section: Robustness To Hedging Pressurementioning

confidence: 75%

Variance disparity and market frictions

Park

¹

2020

Journal of Econometrics

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This paper introduces a new model-free approach to measuring the expectation of market variance using VIX derivatives. This approach shows that VIX derivatives carry different information about future variance than S&P 500 (SPX) options, especially during the 2008 financial crisis. I find that the segmentation is associated with frictions such as funding illiquidity, market illiquidity, and asymmetric information. When they are segmented, VIX derivatives contribute more to the variance discovery process than SPX options. These findings imply that VIX derivatives would offer a better estimate of expected variance than SPX options, and that a measure of segmentation may be useful for policymakers as it signals the severity of frictions.

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“…Bollen and Whaley (2004) and Gârleanu, Pedersen, and Poteshman (2009) show that option prices are also affected by demand pressure. More directly related to this work, Mixon and Onur (2015) show that demand from asset managers puts upward pressure on VIX futures prices, and Cheng (2018) finds that a falling risk premium in VIX futures when risk rises is associated with a falling hedging demand. In addition, rebalancing demand arising from VIX-linked exchange-traded products (ETPs) can impose additional pressure in VIX futures market.…”

Section: Robustness To Hedging Pressurementioning

confidence: 75%

Variance Disparity and Market Frictions

Park

¹

2019

FEDS

0

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This paper introduces a new model-free approach to measuring the expectation of market variance using VIX derivatives. This approach shows that VIX derivatives carry different information about future variance than S&P 500 (SPX) options, especially during the 2008 financial crisis. I find that the segmentation is associated with frictions such as funding illiquidity, market illiquidity, and asymmetric information. When they are segmented, VIX derivatives contribute more to the variance discovery process than SPX options. These findings imply that VIX derivatives would offer a better estimate of expected variance than SPX options, and that a measure of segmentation may be useful for policymakers as it signals the severity of frictions. JEL Classification: G01; G13; G14

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“…A handful of studies compare swaps and futures markets side by side. Mixon and Onur (2015) analyze the volatility derivatives markets by making use of CFTC regulatory data. Comparing the market structure of index variance swaps with VIX volatility futures, they find that VIX futures dominate in maturities of less than a year; whereas variance swaps dominate for longer maturities.…”

Section: Literature Reviewmentioning

confidence: 99%