Price Dislocation and Price Discovery in the S&P 500 Options and VIX Derivatives Markets

Posted: 30 Sep 2015 Last revised: 20 May 2016

See all articles by Yang-Ho Park

Yang-Ho Park

Board of Governors of the Federal Reserve System

Date Written: October 21, 2015

Abstract

This paper introduces the variance equivalence relation that must hold between the SPX options and VIX derivatives. Exploiting such a relation, I find that the SPX option prices were massively dislocated from the VIX derivative prices during the Lehman Brothers crisis, with the former being cheaper than the latter. The dislocation is associated with both funding liquidity and market liquidity, consistent with the limits-to-arbitrage theory. I also find that, whereas the SPX option prices adjust to eliminate the dislocation, the VIX derivative prices do not. This asymmetric result indicates that most of the price discovery occurs in the VIX derivatives rather than in the SPX options.

Keywords: VIX option; VIX future; variance swap; limit of arbitrage; implied variance; financial crisis; liquidity risk

JEL Classification: G01; G13; G14

Suggested Citation

Park, Yang-Ho, Price Dislocation and Price Discovery in the S&P 500 Options and VIX Derivatives Markets (October 21, 2015). Available at SSRN: https://ssrn.com/abstract=2667198 or http://dx.doi.org/10.2139/ssrn.2667198

Yang-Ho Park (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
621
PlumX Metrics