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Consistency between S&P500 and VIX Derivatives: Insights from Model-Free VIX Futures Pricing

40 Pages Posted: 15 Apr 2017 Last revised: 4 Nov 2017

Hendrik Hülsbusch

University of Muenster - Finance Center Muenster

Alexander Kraftschik

University of Muenster - Finance Center Muenster

Date Written: November 2, 2017

Abstract

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 deviates strongly from observed prices. Limited strike ranges do not suffice to reason these deviations, whereas liquidity risks can explain most of it. After controlling for liquidity by constructing higher 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 option markets imply higher volatility risks relative to VIX futures, option 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

Hülsbusch, Hendrik and Kraftschik, Alexander, Consistency between S&P500 and VIX Derivatives: Insights from Model-Free VIX Futures Pricing (November 2, 2017). Available at SSRN: https://ssrn.com/abstract=2952284

Hendrik Hülsbusch

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

Alexander Kraftschik (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=3737

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