This thesis focuses on the VIX index, and on the causality issuesbetween spot and futures prices and the probable 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 attention notonly from academics but practitioners aswell,for various reasons. One of those reasons is that the index is forward lookingand it is widely used as a measure of market risk. Because of this use, theindex 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) havecaptured 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). Furthermore, we have collected somedata on the amount of derivative contracts traded per day and we representcharts which compare the closing prices of VIX index with the closing prices ofS 500.
In the last part of the chapter, we have studied the relation betweenVIX and the stock market.In Chapter 2, we are conducting a literature review on the causalitybetween the VIX spot and the VIX future. We have studded the summary statisticsof the index and its futures and in the second part of this chapter we also examine if there is a long run equilibrium betweenthe VIX spot price and the VIX future price (Enger Granger cointegration test).In Chapter 3 we conduct another econometric test, the vector error correlationmodel (VECM) which has been suggested also from Enger and Granger. Finally, thework’s findings are summarized and discussed.