Essays on the efficiency of volatility derivatives markets

Abstract

This thesis investigates the efficiency of volatility derivatives markets by exploring two questions. First, it examines whether the recently inaugurated and fast growing volatility futures markets are efficient. To this end, Jensen’s (1978) definition of market efficiency is adopted: a market is efficient with respect to the information set It in the casewhere it is impossible to make economic profits by trading on the basis of this information set. Second, it studies whether implied volatility is transmitted between U.S. and European markets and within the European ones, as well as the role of news announcements within an implied volatility spillover framework. Documentation of implied volatility spillovers and a systematic effect of news announcements has implications for the efficiency of volatility derivatives markets. Given the importance and magnitude of volatility derivatives markets answering these two questions is of particular interest to academics. In addition, from the point of view of a practitioner exploring the efficiency of volatility derivatives markets is important because in the case where the efficient market hypothesis is rejected, market participants can potentially devise profitable trading strategies.