Does the VIX act as the main transmitter of mispricing in index futures markets? Insights from European and American regions

Abstract

This study examines the interconnected mispricing of index futures in European and American markets from 2008 to 2023, with a specific focus on the role of the Volatility Index (VIX) and the adjustment for transaction costs in shaping these dynamics. Utilizing the cost of carry model, theoretical prices are computed, and discrepancies with actual market values are analysed to measure actionable mispricing. Econometric tools, including DCC-GARCH, connectedness approach, and quantile regression, are employed to assess dynamic conditional correlations and volatility spillovers, using three distinct datasets: daily mispricing series, weekly mispricing series, and transaction cost-adjusted boundary violation series. This layered approach enables a comprehensive analysis of interconnected mispricing and robustness across different temporal frequencies and adjustments. Our results highlight significant interconnected mispricing driven by market volatilities, with the VIX serving as a pivotal transmitter of volatility during periods of financial turbulence. The analysis demonstrates that the inclusion of the VIX significantly amplifies systemic connectedness, while its exclusion emphasizes regional dynamics, with the Euro Stoxx 50 Index Futures emerging as a principal hub within European markets. The incorporation of transaction costs further reveals critical insights into boundary violations, identifying actionable mispricing and its contribution to systemic volatility, providing a more granular understanding of these dynamics. The robustness of the findings is validated through the use of both daily and weekly data, with consistent patterns of interconnectedness and volatility propagation observed across all analyses.