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A Tale of Two Indices

38 Pages Posted: 28 Dec 2005  

Peter Carr

New York University Finance and Risk Engineering

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 2005

Abstract

In 1993, the Chicago Board of Options Exchange (CBOE) introduced the CBOE Volatility Index. This index has become the de facto benchmark for stock market volatility. On September 22, 2003, the CBOE revamped the definition and calculation of the volatility index, and back-calculated the new index to 1990 based on historical option prices. On March 26, 2004, the CBOE launched a new exchange, the Chicago Futures Exchange, and started trading futures on the new volatility index. Options on the new volatility index are also planned. In this paper, we describe the major differences between the old and the new volatility indices, derive the theoretical underpinnings for the two indices, and discuss the practical motivations behind the recent switch. We also study the historical behavior of the new volatility index and discuss the pricing of VIX futures and options.

Keywords: volatility index; variance swap; volatility swap

JEL Classification: G10, G12, G13

Suggested Citation

Carr, Peter and Wu, Liuren, A Tale of Two Indices (2005). Available at SSRN: https://ssrn.com/abstract=871729 or http://dx.doi.org/10.2139/ssrn.871729

Peter Carr

New York University Finance and Risk Engineering ( email )

6 MetroTech Center
Brooklyn, NY 11201
United States
9176217733 (Phone)

HOME PAGE: http://engineering.nyu.edu/people/peter-paul-carr

Liuren Wu (Contact Author)

City University of New York, CUNY Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3509 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://faculty.baruch.cuny.edu/lwu/

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