Download This PaperA Tale of Two Indices
38 Pages Posted: 7 Nov 2008
There are 2 versions of this paper
Date Written: March 2004
Abstract
In 1993, the Chicago Board of Options Exchange (CBOE) introduced the COBE Volatility Index (VIX). This index has become the de facto benchmark for stock market volatility. On September 22, 2003, the CBOE revamped the definition and calculation of the VIX, and back-calculated the new VIX up to 1990 based on historical option prices. The CBOE is also planning to launch futures and options on the new VIX. In this paper, we describe the major differences between the old and the new VIXs, derive the theoretical underpinnings for the two indices, and discuss the practical motivation for the recent switch. We also study the historical behaviors of the two indices.
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Peter P. Carr
New York University Finance and Risk Engineering ( email )
6 MetroTech Center
Brooklyn, NY 11201
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9176217733 (Phone)
HOME PAGE: http://engineering.nyu.edu/people/peter-paul-carr
Liuren Wu
City University of New York, CUNY Baruch College - Zicklin School of Business ( email )
One Bernard Baruch Way
Box B10-247
New York, NY 10010
United States
646-312-3509 (Phone)
646-312-3451 (Fax)
HOME PAGE: http://faculty.baruch.cuny.edu/lwu/