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Abstract

This study examines the price-discovery function and information efficiency of a fast growing volatility futures market: the Chicago Board of Option Exchange VIX futures market. A linear Engle–Granger cointegration test with an error correction mechanism (ECM) shows that during the full sample period, VIX futures prices lead spot VIX index, which implies that the VIX futures market has some price-discovery function. But a modified Baek and Brock nonlinear Granger test detects bi-directional causality between VIX and VIX futures prices, suggesting that both spot and futures prices react simultaneously to new information. Quarter-by-quarter investigations show that, on average, the estimated parameters are not significantly different from zero, thus providing further evidence supporting information efficiency in the VIX futures market. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark