The Department of Finance and FRIC, Center for Financial Frictions, are proud to announce the upcoming seminar with Peter Van Tassel, Federal Reserve Bank of New York.
Peter Van Tassel will present:
The Law of One Price in Equity Volatility Markets
This paper finds new evidence of systematic law of one price violations in equity volatility markets. While tightly linked, VIX futures exhibit significant deviations from the no-arbitrage prices and bounds implied by the index option market. When risk increases, VIX futures cheapen relative to fair value. The paper documents this result by estimating a dynamic term-structure model that provides a closed form relationship between the prices of variance swaps and VIX futures. A simple trading strategy that exploits the model pricing errors for VIX futures earns significant returns with minimal stock market exposure.
Solbjerg Plads 3,