Abstract
Equity market interactions with their the option markets are modeled using a two state hidden Markov model permitting transitioning between states when the asset market leads and when the option markets lead. Data on S&P 500 returns and returns on the VIX are employed to filter state probabilities and the transition probabilities between the states. The procedures are extended to other assets and their own asset specific VIX markets. Also included is the market for the VIX and options on the VIX as reflected in the VIX of the VIX. Filtered state and transition probabilities are reported on a variety of assets and their asset specific VIX levels.
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