High-frequency trading: Inverse relationship of the financial markets

Abstract

Integration of financial markets due to globalization generates new paradigms of financialization. And with HFT i.e. the high-frequency trading, financialization has distorted the relations of financial markets. HFT is based on highly complex financial products such as Index Options which are linked with volatility and it‘s forecasting. After the introduction of Volatility, VIX Index of Chicago Board of Options Exchange becomes the effective benchmark for stock market volatility now a day. Although VIX Index is a volatility measure derived from Standard and Poor 500 Index (SPX) option prices, traders are unaware of the inverse relationship between these markets. This study purpose is to understand the relationship between the two trading vehicles and increase the market awareness based on high order moment models which are used to mimic the behavior of these index options. It also explains the logic versus perception perspective in option pricing theory to develop theoretical foundations and consider it in future theory erection. Finding shows that SPX index is negatively correlated with VIX Index and financial markets have an inverse relationship between them.