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

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  • Chiu, Junmao
  • Lien, Donald
  • Tsai, Wei-Che

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.

Suggested Citation

  • Chiu, Junmao & Lien, Donald & Tsai, Wei-Che, 2023. "Global financial crisis, funding constraints, and liquidity of VIX futures," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:pacfin:v:80:y:2023:i:c:s0927538x23001725
    DOI: 10.1016/j.pacfin.2023.102101
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