The Information Content of the S&P 500 Index and VIX Options on the Dynamics of the S&P 500 Index
C. San-Lin, W.-C. Tsai, Y.-H. Wang, P.-S. P. Weng
Abstract: Given that both S&P 500 index and VIX options essentially contain information on the future dynamics of the S&P 500 index, in this study, we set out to empirically investigate the informational roles played by these two option markets with regard to the prediction of returns, volatility and density in the S&P 500 index. Our results reveal that the information content implied from these two option markets is not identical. In addition to the information extracted from the S&P 500 index options, all of the predictions for the S&P 500 index are significantly improved by the information recovered from the VIX options. Our findings are robust to various measures of realized volatility and methods of density evaluation.
- Used pairs of VIX calls and puts to recover the VIX levels from put-call parity, and then adopt regression models to examine whether this implied VIX contains any incremental information with regard to future returns on the SP 500
- Adopted the stochastic volatility model of Heston to derive the pricing formulae for both the S&P 500 index and VIX options, calibrate the parameters using the option market prices, and then compare the density predictions generated from these two options market individually and jointly.
- Both contain predictive components, but VIX options improve density predictions and volatility
- A finding which is of particular interest is that the slope coefficient and explanatory power for both the full sample and the extreme scneario are much higher than those for the two sub samples with different market status
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