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The impact of volatility derivatives on S&P500 volatility

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  • Paul Dawson
  • Sotiris K. Staikouras

Abstract

This study investigates whether the newly cultivated platform of volatility derivatives has altered the volatility of the underlying S&P500 index. The findings suggest that the onset of the volatility derivatives trading has lowered the volatility of both the cash market volatility and the cash market index, and significantly reduced the impact of shocks to volatility. When big sudden events hit financial markets, however, the volatility of volatility seems to elevate in the U.S. equity market as a result of increased global correlations. Regardless of the period under examination and the estimator employed, long‐run volatility persistence is present. The latter drops significantly when the credit crunch period is excluded from the post‐event date sample period. The correlation between the broad equity index and the return volatility remains low, which in turn strengthens the role of volatility derivatives to facilitate portfolio diversification. The analysis also shows that volatility is mean reverting, whereas market data support the impact of information asymmetries on conditional volatility. In the post‐event date phase, no asymmetries are found when the recent crisis is not accounted for. Finally, comparisons with other international equity indices, with no volatility derivatives listed, unveil that these indices exhibit higher volatility and slower recovery from shocks than the S&P500 index. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1190–1213, 2009

Suggested Citation

  • Paul Dawson & Sotiris K. Staikouras, 2009. "The impact of volatility derivatives on S&P500 volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(12), pages 1190-1213, December.
  • Handle: RePEc:wly:jfutmk:v:29:y:2009:i:12:p:1190-1213
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    Cited by:

    1. George Filis & Christos Floros & Bruno Eeckels, 2011. "Option listing, returns and volatility: evidence from Greece," Applied Financial Economics, Taylor & Francis Journals, vol. 21(19), pages 1423-1435.
    2. repec:eee:pacfin:v:44:y:2017:i:c:p:13-26 is not listed on IDEAS

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