The Impact of Volatility Derivatives on S&P500 Volatility

Journal of Futures Markets, Vol. 29, pp. 1190-1213, 2009

Posted: 27 Nov 2007 Last revised: 15 Apr 2010

See all articles by Paul Dawson

Paul Dawson

Kent State University

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

Date Written: July 2, 2009

Abstract

This study investigates whether the newly cultivated platform of volatility derivatives has altered the volatility of the underlying S&P500 index. The findings suggest that the onset of the volatility derivatives trading has lowered the volatility of both the cash market volatility and the cash market index, and significantly reduced the impact of shocks to volatility. When big sudden events hit financial markets, however, the volatility of volatility seems to elevate in the US equity market as a result of increased global correlations. Regardless of the period under examination and the estimator employed, long-run volatility persistence is present. The latter drops significantly when the credit crunch period is excluded from the post-event date sample period. The correlation between the broad equity index and return volatility remains low, which in turn strengthens the role of volatility derivatives to facilitate portfolio diversification. The analysis also shows that volatility is mean reverting, while market data support the impact of information asymmetries on conditional volatility. In the post-event date phase, no asymmetries are found when the recent crisis is not accounted for. Finally, comparisons with other international equity indices, with no volatility derivatives listed, unveil that these indices exhibit higher volatility and slower recovery from shocks than the S&P500 index.

Keywords: Conditional volatility, Volatility derivatives, Information asymmetries, TGARCH modeling, S&P500 spot volatility

JEL Classification: C22, G14, G15

Suggested Citation

Dawson, Paul and Staikouras, Sotiris, The Impact of Volatility Derivatives on S&P500 Volatility (July 2, 2009). Journal of Futures Markets, Vol. 29, pp. 1190-1213, 2009. Available at SSRN: https://ssrn.com/abstract=1032184

Paul Dawson

Kent State University ( email )

Kent, OH 44242
United States
330-672-1242 (Phone)

Sotiris Staikouras (Contact Author)

City University - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ALBA Graduate Business School ( email )

Athinas Ave. & 2A Areos Str.
Vouliagmeni 166 71, Athens
Greece

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