Global financial crisis, funding constraints, and liquidity of VIX futures

Junmao Chiu, Donald Lien and Wei-Che Tsai

Pacific-Basin Finance Journal, 2023, vol. 80, issue C

Abstract: We explore the effect of funding constraints on the trading costs of VIX futures. With an increase in funding constraints during a crisis (non-crisis) period, we observe a corresponding increase (decrease) in the proportional effective spread, quoted spread, order cost, asymmetric information, and trade sizes. The leveraged traders play a possible channel in the relationship between funding constraints and trading costs. When leveraged traders face scarce capital during a crisis (non-crisis) period, they increase (decrease) their net long positions to increase (decrease) the hedging pressure that leads to an increase (decrease) in trading costs that decreases (increases) the liquidity.

Keywords: VIX; Liquidity; Global financial crisis; Funding constraints (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:80:y:2023:i:c:s0927538x23001725

DOI: 10.1016/j.pacfin.2023.102101

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