Is VIX Index Manipulated ?

An important academic paper which raises several interesting questions about suspicious behavior of VIX Index:

Authors: Griffin, Shams

Title: Manipulation in the VIX ?



At the settlement time of the VIX Volatility Index, volume spikes on S&P 500 Index (SPX) options, but only in the out-of-the-money options that are used to calculate the VIX, and more so for options with a higher and discontinuous influence on VIX. We investigate alternative explanations of coordinated liquidity trading and hedging. Tests including those utilizing differences in put and call options, open interest around the settlement, and a similar volatility contract with an entirely different settlement procedure are inconsistent with these explanations, but consistent with market manipulation. Size and liquidity differences between the SPX and VIX markets may facilitate the sizeable settlement deviations.

Notable quotations from the academic research paper:

"The VIX setting is one with two markets with different liquidities and transactions costs: SPX options market with large bid-ask spreads that make it difficult to arbitrage away price deviations, and large and liquid upper-level market tied to it that translates such deviations into a sizable potential payout.

The Chicago Board Options Exchange Volatility Index (VIX) is a widely tracked index that gauges the thirty-day, forward-looking volatility implied in the market, often referred to as a market `fear-gauge'. Anderson, Bondarenko, and Gonzalez-Perez (2015) demonstrate that the VIX index can exhibit deviations from true volatility due to the inclusion criteria of illiquid options. Futures and options on the VIX have a relatively large volume. Every month, a settlement occurs where the value of VIX derivatives is set equal to the VIX value calculated from SPX options. This settlement value is calculated using the VIX formula from a full range of out-of-the-money (OTM) SPX put and call options with various exercise prices. A manipulator would need to move the price of these lower-level SPX options to influence the VIX settlement calculation and the value of expiring upper-level VIX derivatives. But, manipulators could leave footprints in the data.

Several interesting data patterns emerge:

First, at the exact time of monthly VIX settlement, highly statistically and economically significant trading volume spikes occur in the underlying SPX options.

Second, the spike occurs only in the OTM SPX options that are included in the VIX settlement calculation and not in the excluded in-the-money (ITM) SPX options.

Third, there is no spike in volume for similar S&P 100 Index (OEX) or SPDR S&P 500 ETF (SPY) options that are unconnected to volatility index derivatives.

Fourth, the VIX calculation is more sensitive to price changes of deeper OTM SPX put options. If traders sought to manipulate the VIX settlement, they would want to move the prices by optimally spreading their trades across the SPX strikes and increasing the number of trades in the far OTM put options. Trading volume at settlement follows this pattern, whereas normally far OTM options are rarely traded.

Fifth, there are certain options that exhibit discontinuously higher weighting in the settlement but are otherwise very similar to other OTM options. These options, weighted higher in the VIX calculation, exhibit a jumps in trading volume at settlement."

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