Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Spiking the Volatility Punch

Spiking the Volatility Punch An alternative volatility index called SPIKES has been recently introduced. Like VIX, SPIKES aims to forecast S&P 500 volatility over a 30-day horizon and both indexes are based on the same theoretical formula; yet, they differ in several ways. While some differences are introduced in response to the controversy surrounding possible VIX manipulation, others are due to the choice of the S&P500 exchange-traded fund (ETF), named SPY, as a substitute for the S&P500 (SPX) Index itself. Indeed, options on the SPX, used for VIX computation, are European-style, whereas options on the SPY ETF, used for SPIKES computation, are American-style. Overall, the difference is mainly due to the early exercise premium of the component options and the dividend timing of the underlying SPY versus SPX and we assess the magnitude of these separate contributions under the benchmark Black, Merton and Scholes setting. By applying both the finite difference method and newly-derived approximation formulas we show that the new SPIKES index will track the VIX index as long as 30-day US interest rates and annualized dividend yields continue to be range-bound between 0 and 10% per year. Hence, after more that 20 years of supremacy, VIX may have found its first competitor. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

Spiking the Volatility Punch

Download PDF

Spiking the Volatility Punch

Abstract

An alternative volatility index called SPIKES has been recently introduced. Like VIX, SPIKES aims to forecast S&P 500 volatility over a 30-day horizon and both indexes are based on the same theoretical formula; yet, they differ in several ways. While some differences are introduced in response to the controversy surrounding possible VIX manipulation, others are due to the choice of the S&P500 exchange-traded fund (ETF), named SPY, as a substitute for the S&P500 (SPX) Index...
Loading next page...
 
/lp/taylor-francis/spiking-the-volatility-punch-be1hBKSQLA
Publisher
Taylor & Francis
Copyright
© 2021 Informa UK Limited, trading as Taylor & Francis Group
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/1350486X.2021.1893196
Publisher site
See Article on Publisher Site

Abstract

An alternative volatility index called SPIKES has been recently introduced. Like VIX, SPIKES aims to forecast S&P 500 volatility over a 30-day horizon and both indexes are based on the same theoretical formula; yet, they differ in several ways. While some differences are introduced in response to the controversy surrounding possible VIX manipulation, others are due to the choice of the S&P500 exchange-traded fund (ETF), named SPY, as a substitute for the S&P500 (SPX) Index itself. Indeed, options on the SPX, used for VIX computation, are European-style, whereas options on the SPY ETF, used for SPIKES computation, are American-style. Overall, the difference is mainly due to the early exercise premium of the component options and the dividend timing of the underlying SPY versus SPX and we assess the magnitude of these separate contributions under the benchmark Black, Merton and Scholes setting. By applying both the finite difference method and newly-derived approximation formulas we show that the new SPIKES index will track the VIX index as long as 30-day US interest rates and annualized dividend yields continue to be range-bound between 0 and 10% per year. Hence, after more that 20 years of supremacy, VIX may have found its first competitor.

Journal

Applied Mathematical Finance – Taylor & Francis

Published: Nov 1, 2020

Keywords: Volatility modelling; VIX; SPIKES; American Options; Exercise boundary

References

  • The Vix, the Variance Premium and Stock Market Volatility
  • The Pricing of Options and Corporate Liabilities
  • Option Prices, Implied Price Processes, and Stochastic Volatility
  • Variance Risk Premiums
  • Alternative Characterizations of American Put Options
  • More than You Ever Wanted to Know about Volatility Swaps
  • The Early Exercise Premium for the American Put under Discrete Dividends
  • Manipulation in the Vix?
  • The Model-free Implied Volatility and Its Information Content
  • Extracting Model-free Volatility from Option Prices: An Examination of the Vix Index
  • Pricing by American Option by Approximating Its Early Exercise Boundary as a Multipiece Exponential Function
  • Pricing Variance Swaps with Cash Dividends
  • Valuation of American Call Options