Abstract
This thesis studies two related topics on derivatives markets. The first one is on the implied volatility smirk (IVS) in the VIX options markets (Chapter 2) and its relationship with the IVS in the VXX and SPX options markets (Chapter 4), while the second one is on currency futures trading (Chapter 3).
Chapter 2 investigates the characteristics of the term structure of the IVS observed in the options market of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which serves as a benchmark for measuring Standard & Poor’s 500 Index (SPX) volatility. The chapter finds that the IVS of VIX options is positively skewed with negative curvature, representing a unique dynamic compared to commonly observed smirk or smile shapes. The term structure of the IVS factors–level, slope, and curvature–follow a downward-sloping pattern, with values decreasing as maturity lengthens. The slope of the IVS exhibits significant positive predictability for VIX futures returns at various data frequencies, outperforming existing perception proxies in the stock and volatility markets, and is robust to alternative specifications of returns and slopes.
Chapter 3 addresses the need for more comparative research on the dynamics of currency futures risk premia and the impact of different types of traders’ short- and long-term trading activities. Furthermore, the chapter investigates the drivers of traders’ hedging pressure to enhance our understanding of the sources of predictability in hedging pressure. Furthermore, the chapter investigates the drivers of traders’ hedging pressure to enhance our understanding of the sources of predictability in hedging pressure. We find that the hedging pressure of different types of traders can predict the currency futures risk premium in the six currency futures markets. Additionally, the chapter shows that hedging pressure serves as a vital link between FX futures risk premia and fundamental factors. Specifically, it demonstrates that macroeconomic information regarding currency futures risk premia operates indirectly through hedging pressure, as well as directly through other conventional determinants of futures risk premia.
Chapter 4 demonstrates a strong relationship between VXX and SPX options markets, surpassing the link between VIX and SPX through their IVS factors. The level and curvature of VXX offer valuable insights into SPX implied volatility surface parameters, while VIX IVS slope is more informative of SPX IVS. We observe significant differences in the impact of shocks on VIX and VXX, and their distinct relationships with the underlying asset result from tradability with different time horizons. The level of IVS derived from the
SPX, VIX, and VXX options markets have positive predictive power for one-month-ahead SPX index returns, with only the slope residual of VIX and VXX showing significant and negative predictability.