This thesis focuses on the VIX index, and on the causality issues
between spot and futures prices and the possible predictability of VIX index to
the realized volatility.
The VIX index was created by the CBOE (Chicago Board Option Exchange) in
1993 and it aims at estimating the implied volatility of S&P 500. More
precisely, VIX is an index of implied volatility of 30-day options on the
S&P 500 calculated from a wide range of call and puts (www.investopedia.com).
The index itself and the derivatives written on it have drawn great attention
from both academics and practitioners for various reasons. One of those reasons
is that the index is forward looking and it is widely used as a measure of
market risk. Because of this use, the index is also called “fear gauge”.
Nowadays, the VIX is really important especially for investors. It can not
only be used as a measure of how much the market thinks the S&P 500 will
fluctuate in the 30 days (www.cboe.com), but it can also be used to hedge the
risk of investments in the stock market by taking the opposite position to the
VIX products (derivatives or ETFs). Furthermore, it can be used for speculation
reasons, as an investor can bet on the increase or the decrease of the index.
Both the issues that we plan to study (causality and predictability)
have captured many researchers’ attention.
This thesis structure will be as follows. In the First Chapter, we
present the index and the way it has been calculated. VIX was based on S
100 till 2003, since then is based on the S 500. Furthermore, we review
the basics of the derivatives written on the VIX and its ETFs. Moreover, we
present details about the main reason of the popularity of this index and its
uses (hedging, speculation and forecasting). In the last part of the chapter,
we have collected some data on the amount of derivative contracts traded per
day and we represent charts which compare the closing prices of VIX index with
the closing prices of S 500.
In Chapter 2, we are conducting a literature review on the causality
between the VIX spot and the VIX future. We examine if there is a lead-lag
relation between the VIX spot price and the VIX future price. In the second
part of this chapter we also conduct a literature review on the prediction of
VIX spot to realized variance of S 500.
In Chapter 3 two very famous econometric tests are conducted. The first one
is the Engle-Granger cointegration test, a test which provides useful information
but has some weaknesses. Those
weaknesses can be dealt with another econometric test, the vector error correlation
model (VECM). Finally, the work’s findings are summarized and discussed.