Determinants of Price Discovery in the VIX Futures Market
59 Pages Posted: 23 May 2017
Date Written: April 12, 2017
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: Suggested Citation