TY - JOUR
T1 - Spiking the Volatility Punch
AU - Carr, Peter
AU - Figà-Talamanca, Gianna
N1 - Funding Information:
Gianna Figà-Talamanca was the recipient of research mobility funds from the University of Perugia during the preparation of this paper. The H2CU center is also acknowledged for indirect funding. The paper was written while Gianna Figà-Talamanca was Visiting Professor at the Department of Finance and Risk Engineering, New York University, New York (NY), USA; Università degli Studi di Perugia [FRB 2018; Research mobility personal funding.]. The authors wish to thank Haiming Yue for valuable research assistance.
Publisher Copyright:
© 2021 Informa UK Limited, trading as Taylor & Francis Group.
PY - 2020
Y1 - 2020
N2 - 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.
AB - 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.
KW - American Options
KW - Exercise boundary
KW - SPIKES
KW - VIX
KW - Volatility modelling
UR - http://www.scopus.com/inward/record.url?scp=85103424276&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85103424276&partnerID=8YFLogxK
U2 - 10.1080/1350486X.2021.1893196
DO - 10.1080/1350486X.2021.1893196
M3 - Article
AN - SCOPUS:85103424276
SN - 1350-486X
VL - 27
SP - 495
EP - 520
JO - Applied Mathematical Finance
JF - Applied Mathematical Finance
IS - 6
ER -