Determinants of Price Discovery in the VIX Futures Market

59 Pages Posted: 23 May 2017

See all articles by Yu-Lun Chen

Yu-Lun Chen

Chung Yuan Christian University - Department of Finance

Wei-Che Tsai

Oregon State University; National Sun Yat-sen University - Department of Finance

Date Written: April 12, 2017

Abstract

We utilize the respective information share and common factor component weight approaches of Hasbrouck (1995) and Gonzalo and Granger (1995) to examine price discovery competition between the VIX and VIX futures. Our results show that VIX futures prices play a dominant role in the overall process of price discovery. An increase in the price difference between the VIX and VIX futures, commonly referred to as the futures basis, causes a corresponding increase in the contribution to price discovery made by VIX futures. Our empirical results also show that news announcements on macro-economic issues in the United States increase the dominant role of VIX futures in the overall process of price discovery. This dominant role remains unchanged when compared to VIX exchange-traded products and the volatility indices on non-US equity exchange-traded funds.

Keywords: Price discovery; VIX; VIX futures; Futures basis; Information shares

JEL Classification: C32, G01, G14

Suggested Citation

Chen, Yu-Lun and Tsai, Wei-Che, Determinants of Price Discovery in the VIX Futures Market (April 12, 2017). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2972441

Yu-Lun Chen

Chung Yuan Christian University - Department of Finance ( email )

200 Chung Pei Rd
Chung Li City, 32023
Taiwan

Wei-Che Tsai (Contact Author)

Oregon State University ( email )

Corvallis, OR 97331
United States

National Sun Yat-sen University - Department of Finance ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

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