Analysis of VIX Markets with a Time-Spread Portfolio | Hanlon Financial Systems Center

Analysis of VIX Markets with a Time-Spread Portfolio

Analysis of VIX Markets with a Time-Spread Portfolio

seminar date: 
Thursday, December 1, 2016 - 6:15pm
seminar location: 
Fielding Room (3rd Floor Howe Center)
Andrew Papanicolaou, Assistant Professor, NYU Tandon School of Engineering

This article explores the relationship between option markets for the S&P500 (SPX) and CBOE's Volatility Index (VIX). Results are obtained by using the so-called timespread portfolio to replicate a future contract on the squared VIX. The time-spread portfolio is a powerful tool because it provides a model-free link between derivative prices for SPX and VIX. Time spreads can be computed from SPX put options with dierent maturities, which results in a term structure for squared volatility. This term structure can be compared to the VIX-squared term structure that is backed-out from VIX call options. The time-spread portfolio is also used to measure volatility-of-volatility (vol-of-vol) and the volatility leverage effect. There may emerge small dierences in these measurements, depending on whether time spreads are computed with options on SPX or options on VIX. A study of 2012 daily options data shows that vol-of-vol estimates utilizing SPX data will reflect the volatility leverage effect, whereas estimates that exclusively utilize VIX options will predominantly reflect the premia in the VIX-future term structure.



Andrew Papanicolaou was born in New York City in 1980, attended public school in New Jersey until age 13, then moved to California. Received Bachelors in applied mathematics from UC Santa Barbara in 2003, completed a masters in financial mathematics at University of Southern California in 2007, and submitted his PhD thesis entitled “New Methods in Theory and Applications of Nonlinear Filtering” at Brown University in May 2010. Was a postdoctoral fellow and lecturer at Princeton in the department of ORFE from 2010 to 2013, and we a lecturer at the University of Sydney in the School of Mathematics & Statistics.