On the Intraday Relation between the VIX and Its Futures

29 Pages Posted: 31 Jan 2014

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law

Robert I. Webb

University of Virginia - McIntire School of Commerce

Date Written: December 16, 2013

Abstract

The Chicago Board Options Exchange (CBOE) introduced the CBOE Volatility Index (VIX) in 1993. The index has come to act as the benchmark for stock market volatility and, more generally, investor sentiment. The VIX has proven to be very useful in forecasting the future market direction especially during high volatility periods. In order to expedite trading in volatility, as well as increase hedging opportunities, the CBOE introduced futures on the VIX (henceforth referred to as VXF) on March 26, 2004.

We study the intraday dynamics of the VIX and VXF for the period January 2, 2008 to December 31, 2012. Applying a Vector Autoregression (VAR) model on daily data, we observe some evidence of causality from the VXF to the VIX. However, estimating a VAR using our ultra-high frequency data, we find strong evidence for bi-directional Granger causality between the VIX and the VXF. Overall, this effect appears to be stronger from the VXF to the VIX than the other way around. Impulse response functions and variance decompositions analysis further confirm the dominance of the VXF. Lastly, we show that the causality from the VXF to the VIX has been increasing over our sample period, whereas the reverse causality has been decreasing. This finding suggests that the VIX futures have become increasingly more important in the pricing of volatility. We further document that the VIX futures dominate the VIX more on days with negative returns, and on days with high values of the VIX, suggesting that on those days investors use VIX futures to hedge their positions rather than trading in the S&P 500 index options.

Keywords: VIX, Futures, Vector Autoregressions, Ultra-High Frequency Data

JEL Classification: C11, C13

Suggested Citation

Frijns, Bart and Tourani-Rad, Alireza and Webb, Robert I., On the Intraday Relation between the VIX and Its Futures (December 16, 2013). Available at SSRN: https://ssrn.com/abstract=2387877 or http://dx.doi.org/10.2139/ssrn.2387877

Bart Frijns (Contact Author)

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Robert I. Webb

University of Virginia - McIntire School of Commerce ( email )

Rouss and Robertson Halls 125 Ruppel Lane
Charlottesville, VA 22903
United States
(434) 924-7570 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
318
Abstract Views
1,278
rank
95,493
PlumX Metrics