The VIX index is computed as a weighted average of SPX option prices over a range of strikes according to specific rules regarding market liquidity. Using tick-by-tick observations on the underlying options, we document that this strike range varies substantially in how much coverage it provides of the distribution of future S&P 500 index prices, producing significant biases, or distortions, in the time series of VIX measures. We propose a novel high-frequency Corridor Implied Volatility index (CX) computed from a strike range covering an “economically invariant” proportion of the future S&P 500 index values and using only reliable option quotes. Comparing the time series properties of these alternative volatility indices from June 2008 through June 2010, we find that our CX measure is superior in terms of filtering out noise and avoiding large artificial jumps. Consequently, the properties of the two series at both the daily and the intraday level are dramatically different in important dimensions of relevance for asset pricing, risk management and real-time trading strategies.
|Original language||English (US)|
|Number of pages||54|
|State||Published - Jan 2011|
Andersen, T. G., Bondarenko, O., & Gonzalez-Perez, M. T. (2011). A Corridor Fix for VIX: Developing a Coherent Model-Free Option-Implied Volatility Measure. http://www.kellogg.northwestern.edu/faculty/gonzalezperez/MTGP,%20Kellogg%20School%20of%20Management,%20Northwestern%20University_files/JobMarketPaper_Maria_T_Gonzalez_Perez.pdf