Abstract
Recently, an influential academic study and many lawsuits have claimed that the VIX index has been manipulated since 2008. In this paper, we construct a regression model with explanatory variables that are exogenous to the index and examine the model prediction errors. We find that the movements in the daily levels of the VIX index are explained by market fundamentals and not by manipulation. We also specifically examine the VIX futures expiration days and demonstrate that the VIX closing values and VIX futures settlements prices on those days are consistent normal market forces and are not artificial.
Highlights
The Chicago Board Options Exchange Volatility Index (VIX) is the most popular measure of the market’s expectation of volatility over the near-term future
We examined the daily level of the VIX index for signs of manipulation, as has been alleged during the period January 2008 to the present
We constructed a model using explanatory variables that are exogenous to the index and found that the results strongly support the movement in the VIX being explained by market fundamentals: the results overwhelmingly do not support a claim of manipulation
Summary
The Chicago Board Options Exchange Volatility Index (VIX) is the most popular measure of the market’s expectation of volatility over the near-term future. The VIX hit a high of over 80 during the 2008 market meltdown. During the slowly rising market of 2017, the VIX averaged around 11. There has been a growing acceptance of VIX and VIX-linked products (such as VIX futures and options) for use as risk management tools, and trading of these instruments has expanded dramatically over time. Because of its excellent liquidity and its negative correlation with broad stock market movements, VIXlinked products are useful hedging instruments. Portfolio managers can mitigate downward movements in the general level of stock prices by buying volatility, i.e., by buying VIX futures and options
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