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201354 Pap

201354 Pap

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Published by: caitlynharvey on Aug 22, 2013
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The high-frequency SPX futures data are used to compute delta-hedged SPX op-

tion returns and high-frequency-based jump variations. In particular, we use small-

denomination (E-mini) SPX future prices because Hasbrouck (2003) finds that price

information is discovered in the E-mini market as opposed to the regular market or

exchange-traded funds. The E-mini SPX futures data come from Thomson Reuters

Tick History. Although the E-mini futures trade overnight in the electronic Globex

venue, we include the five-minute interval returns for 8:30 a.m. to 3:15 p.m. only

when the CBOE option market is open.

We make use of the front-month VIX futures returns when computing RVV, and

match the maturities of the VIX futures to those of the VIX options when constructing

delta-hedged VIX options. The high-frequency VIX futures data for 8:30 a.m. to 3:15

p.m. are obtained from Thomson Reuters Tick History.

The options data come from OptionMetrics. Option prices are taken from the

bid-ask midpoint on each day’s close of the option market. With respect to the SPX

options, the CBOE option market closes 15 minutes later than the SPX spot market.

To address the issue of nonsynchronous trading hours, we back out the spot price

for each of the first three pairs of near-the-money SPX put and call options by using

the put-call parity (see, for example, Ait-Sahalia and Lo (1998) and Ait-Sahalia and

Lo (2000)) and take the average of the three extracted prices. Then, we eliminate

options violating the usual lower bound constraints:


t (τ,K)max(0,St(τ)exp(qtτ)K exp(rf

t τ))


t (τ,K)max(0,K exp(rf

t τ)St(τ)exp(qtτ)),


where CS

t (τ,K) and PS

t (τ,K) are the time t prices of SPX call and put options with

time to maturity τ and strike price K, St(τ) is the time t implied SPX price with time

to maturity τ, and qt is the dividend payout rate. Treasury bill rates and dividend

rates are also obtained from OptionMetrics.

In addition, when running our regression analysis, we apply a rather tight filtering

scheme for inaccurate or illiquid options. Specifically, we delete the SPX options for

which the mid price is less than 0.5, the implied volatility is lower than 5% or higher

than 100%, or the relative bid-ask spread is larger than 0.5, where the relative bid-ask


spread is defined as 2(ask−bid)

(ask+bid) . We also delete the VIX options for which the mid price

is less than 0.2, the implied volatility is lower than 10% or higher than 150%, or the

relative bid-ask spread is larger than 0.5.

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