CLSBE - Dissertações de Mestrado / Master Dissertations

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Testing for linear and nonlinear granger causality in 0DTE options volume and the VIX Index
Publication . Andreassen, Markus Lindgren; Schliephake, Eva
In this thesis I investigate the dynamic temporal relationship between trading volume of 0DTE SPX options and the VIX Index. The analysis is conducted with the traditional linear Granger causality test, and by applying the modified Baek & Brock test proposed by Hiemstra & Jones (1994) to investigate nonlinear Granger causality. Within the context of linear causality, I find strong evidence of unidirectional causality from the VIX to 0DTE volume in all models, apart from the subsample from July 2021 to May 2023. Additionally, there is evidence of bidirectional causality in the linear tests depending on the sample period and model selection. In contrast I find strong evidence of a nonlinear causal effect from 0DTE volume to the VIX in all models, with the full sample and in the period July 2021 to May 2023, with weak evidence for bidirectional causality. This contradicts the findings from linear causality testing. Further, the findings suggest that the significance of the nonlinear relationship parallels with the rise in popularity of 0DTE options. This thesis demonstrates the importance of testing for nonlinear causal relationships in economic and financial data, when investigating their drivers and relationships.
2023-06-28Master thesis Open access Show more