The Role of Intermediaries in Derivatives Markets: Evidence from VIX Options

Consistent with models in which intermediaries absorb net demand pressure from end-users and respond by changing prices, net option demand is positively related to option prices in the market for VIX puts and VIX calls. These findings are consistent with existing results for S&P 500 index (SPX) options (Bollen and Whaley (2004)). They are very robust to variations in the empirical implementation. A joint analysis of net demand pressure in VIX and SPX option markets suggests that the VIX option markets are highly integrated with the SPX put market, but much less so with the market for SPX calls. The impact of net demand shocks on future prices is limited, but shocks to prices significantly affect future net demand.