This thesis focuses on the VIX index, and on the causality issuesbetween spot and futures prices and the possible predictability of VIX index tothe realized volatility.
The VIX index was created by the CBOE (Chicago Board Option Exchange) in1993 and it aims at estimating the implied volatility of S&P 500. Moreprecisely, VIX is an index of implied volatility of 30-day options on theS&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 attentionfrom both academics and practitioners for various reasons. One of those reasonsis that the index is forward looking and it is widely used as a measure ofmarket risk.
Because of this use, the index is also called “fear gauge”.Nowadays, the VIX is really important especially for investors. It can notonly be used as a measure of how much the market thinks the S&P 500 willfluctuate in the 30 days (www.cboe.com), but it can also be used to hedge therisk of investments in the stock market by taking the opposite position to theVIX products (derivatives or ETFs). Furthermore, it can be used for speculationreasons, 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, wepresent the index and the way it has been calculated.
VIX was based on S100 till 2003, since then is based on the S 500. Furthermore, we reviewthe basics of the derivatives written on the VIX and its ETFs. Moreover, wepresent details about the main reason of the popularity of this index and itsuses (hedging, speculation and forecasting). In the last part of the chapter,we have collected some data on the amount of derivative contracts traded perday and we represent charts which compare the closing prices of VIX index withthe closing prices of S 500. In Chapter 2, we are conducting a literature review on the causalitybetween the VIX spot and the VIX future. We examine if there is a lead-lagrelation between the VIX spot price and the VIX future price.
In the secondpart of this chapter we also conduct a literature review on the prediction ofVIX spot to realized variance of S 500.In Chapter 3 two very famous econometric tests are conducted. The first oneis the Engle-Granger cointegration test, a test which provides useful informationbut has some weaknesses. Thoseweaknesses can be dealt with another econometric test, the vector error correlationmodel (VECM). Finally, the work’s findings are summarized and discussed.