Consistency between S&P500 and VIX Derivatives: Insights from Model-Free VIX Futures Pricing
41 Pages Posted: 15 Apr 2017 Last revised: 6 Feb 2018
Date Written: February 6, 2018
This paper studies the interdependencies between the VIX futures market and the S&P500 and VIX options markets using a model-free pricing method for VIX futures. We show that the replication strategy for the VIX futures greatly deviates from the observed prices. Limited strike ranges do not suffice to explain these deviations, whereas the options' bid-ask spreads can explain most of it. After controlling for the bid-ask spreads by constructing upper and lower bounds for the VIX futures price, we find a lead-lag structure between markets segmented by product, not by its underlying. Our model-free analysis shows that if options markets imply higher volatility risks relative to VIX futures, options prices in both markets adjust and vice versa.
Keywords: Model-Free Pricing, S&P500 Options, VIX Futures, VIX Options, Volatility Risk
JEL Classification: G13, G14
Suggested Citation: Suggested Citation