Theses and Dissertations - Department of Economics, Finance & Legal Studies
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Item Three essays on the vix index(University of Alabama Libraries, 2018) Arnatt, Richard Anthony; Brooks, Robert Edwin; University of Alabama TuscaloosaThis dissertation comprises three essays based on the VIX Index, the Chicago Board Options Exchange’s (CBOE) index representing S&P 500 Index implied volatility. The first essay looks at the performance of VIX-related Exchange Traded Notes (ETN). These instruments benchmarked to futures prices are designed to give exposure to stock market volatility. Performance has been poor, owing to the upward sloping nature of the VIX futures curve. The introduction of the notes appears to have coincided with a fundamental change in the pricing of VIX futures, resulting in a steeper futures curve and worse performance for ETNs than would have occurred previously. A strategy of carrying out the reverse of the trades represented by the underlying benchmark is shown to be profitable. The extent to which ETN managers cover their positions appears correlated with the slope of the futures curve. The second essay asks if volatility indices predict realized volatility. I find that the VIX Index tends to overstate subsequent realized S&P 500 Index volatility and shows mild predictive value. The VVIX Index, a measure of VIX Index implied volatility, tends to understate realized VIX Index volatility and has little predictive value. I demonstrate that the volatility indices do not, however, by construction, directly reflect interperiod volatility as measured by standard deviation. The third essay looks at the problem of analyzing futures prices in the specific case of the VIX Index. The maturity of futures contracts change continuously, which poses problems for assessing notional futures prices of specified maturity and the shape of the futures curve. Benchmarks for VIX-related ETNs use linear interpolation of the futures prices nearest to the desired maturity to provide a notional value for a futures contract of 30 or 90 days duration. I show that this does not reflect the true shape of the futures curve. I apply a method designed by Charles Nelson and Andrew Siegel for modeling yield curves to the VIX futures term structure. This gives a better estimate for prices of notional contracts of specific maturity than linear interpolation, and reflects the non-linear, asymptotic nature of the futures curve.