Time-dependent lead-lag relationships between the VIX and VIX futures markets

TL;DR

This paper uses the TOPS method to analyze the evolving lead-lag relationships between the VIX and VIX futures markets, revealing shifts in dominance and the growing importance of futures in price discovery over time.

Contribution

It introduces the application of the symmetric TOPS method to study the dynamic interactions between VIX and VIX futures markets, highlighting temporal changes in their relationships.

Findings

VIX initially dominated VIX futures before VIX options were introduced.

Lead-lag relationships alternate over time rather than showing consistent dominance.

VIX futures have become more influential in price discovery since VIX ETPs launched.

Abstract

We utilize the symmetric thermal optimal path (TOPS) method to examine the dynamic interaction patterns between the VIX and VIX futures markets. We document that the VIX dominates the VIX futures more in the first few years, especially before the introduction of VIX options. We further observe that the TOPS paths show an alternate lead-lag relationship instead of a dominance between the VIX and VIX futures in most of the time periods. Meanwhile, we find that the VIX futures have been increasingly more important in the price discovery since the launch of several VIX ETPs.