Market Efficiency Test in the VIX Futures Market

Market Efficiency Test in the VIX Futures Market

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This paper applies the daily settlement prices of the VIX futures to test the random walk hypothesis (RWH) and the weak form market efficiency in the VIX futures market. Both the unit root test and the uncorrelated increments test are applied. The unit root test includes the Augmented Dicky-Fuller (ADF) test and the Kwiatkowski, Phillips, Schmidt and Shin (KPSS) test. The uncorrelated increments test includes that the serial correlation coefficient test (Ljung-Box Q test) and the Lo-MacKinlay Variance Ratio (VR) test. The Jarque-Bera test for the normality of residuals is applied for a robustness check. This paper tests the aggregated market price series as well as the price series of each individual futures contract. For the aggregated market price series, the test results suggest that the VIX futures market is efficient because there is a unit root in the aggregated market price series. For the individual VIX futures price series, there are 51 out of 54 futures meet the sufficient condition for an efficient market: the prices are found to follow a random walk either because there is a unit root existing in the price series or because the increments are not correlated.Introduction The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) has become the benchmark for stock market volatility since 1993, when the CBOE first introduced the VIX into the market. The VIX is the implied volatility basedanbsp;...

Title:Market Efficiency Test in the VIX Futures Market
Author: Jian Zhang
Publisher:ProQuest - 2008

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