Variance disparity and market frictions
Journal of Econometrics, 2020, vol. 214, issue 2, 326-348
This paper introduces a new model-free approach to measuring the expectation of market variance using VIX derivatives. This approach shows that VIX derivatives carry different information about future variance than S&P 500 (SPX) options, especially during the 2008 financial crisis. I find that the segmentation is associated with frictions such as funding illiquidity, market illiquidity, and asymmetric information. When they are segmented, VIX derivatives contribute more to the variance discovery process than SPX options. These findings imply that VIX derivatives would offer a better estimate of expected variance than SPX options, and that a measure of segmentation may be useful for policymakers as it signals the severity of frictions.
Keywords: Economic uncertainty; Illiquidity; Asymmetric information; Implied variance; VIX derivative (search for similar items in EconPapers)
JEL-codes: G01 G13 G14 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:214:y:2020:i:2:p:326-348
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