Investors use volatility derivatives to diversify and hedge their risk in equity and credit portfolios. Since long-term investors in equity funds are exposed to downside risk, volatility can be used as a hedge for the tail risk and replacement for the put options. In the United States, the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) measures the short-term volatility implied by S&P 500 stock index option prices. Many people around the world use the VIX to measure the stock market volatility over the next 30-day period. In Europe, the EURO STOXX 50 Volatility (VSTOXX) market index is based on the market prices of a basket of Euro STOXX 50 Index Options (OESX) and measures the implied market volatility over the next 30 days on the EURO STOXX 50 Index. For benchmark strategies utilizing the EURO STOXX 50 Index, the nature of its negative correlation with the VSTOXX presents a viable way of avoiding benchmark-rebalancing costs. The statistical nature of volatility allows traders to perform mean-reverting strategies, dispersion trading, and volatility spread trading, among others.
In this chapter, we will take a look at performing data analytics on the VSTOXX, EURO STOXX 50 Index, and OESX. The code presented here runs on the IPython Notebook, the interactive component of Python, to help us visualize data and study relationships between them.
In this chapter, we will discuss the following topics:
- Introduction to STOXX and the Eurex Exchange
- Introduction to the EURO STOXX 50 Index, VSTOXX, and VIX
- Gathering the EURO STOXX 50 Index and VSTOXX data with Python
- Using the
urllibandlxmlmodules to read and traverse HTML data - Understanding the file data format published by VSTOXX
- Performing financial analytics on the EURO STOXX 50 Index and VSTOXX
- Gathering the OESX data from the Eurex website
- Studying the formula used in calculating the VSTOXX sub-indexes
- Calculating the VSTOXX sub-indexes using OESX
- Studying the formula used in calculating the VSTOXX main index
- Calculating the VSTOXX main index from the VSTOXX sub-indexes
- Analyzing the results between the calculated values and actual values
The two most popular volatility indexes worldwide are the VIX and VSTOXX, which are available in the United States and Europe respectively. The VSTOXX is based on OESX that trades on the Eurex Exchange. The Eurex Exchange website provides comprehensive information on the VSTOXX sub-indices and historical data, which we can analyze. We begin by understanding the background of these products before performing financial analytics on them in the later sections of this chapter.
In the United States, the Dow Jones Industrial Average is one of the most widely watched stock market indexes, created of course by Dow Jones. In Europe, one such company is STOXX Limited.
Formed in 1997, STOXX Limited is headquartered in Zurich, Switzerland and calculates approximately 7,000 indices globally. As an index provider, it develops, maintains, distributes, and markets a comprehensive range of indices that are known to be strictly rule-based and transparent.
STOXX provides a number of equity indices in the categories: benchmark indices, blue-chip indices, dividend indices, size indices, sector indices, style indices, optimized indices, strategy indices, theme indices, sustainability indices, faith-based indices, smart beta indices, and calculation products.
The Eurex Exchange is a derivatives exchange in Frankfurt, Germany offering more than 1,900 products, including equity indices, futures, options, ETFs, dividends, bonds, and repos. Many of STOXX's products and derivatives trade on the Eurex.
Designed by STOXX Limited, the EURO STOXX 50 Index is one of the most liquid stock indexes worldwide, serving many indices products listed on the Eurex. It was introduced on February 26 1998 and is made up of 50 blue-chip stocks from the 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. The EURO STOXX 50 Index futures and options contracts are available and traded on the Eurex Exchange. Recalculation of the index takes place typically every 15 seconds based on real-time prices.
The ticker symbol for the EURO STOXX 50 Index is SX5E. EURO STOXX 50 Index Options take on the ticker symbol OESX. We may come across these symbols when working with EURO STOXX 50 Index data in the later sections of this chapter.
The VSTOXX or EURO STOXX 50 Volatility is a class of volatility derivatives serviced by the Eurex Exchange. The VSTOXX market index is based on the market prices of a basket of OESX quoted at-the-money or out-of-the-money. It measures the implied market volatility over the next 30 days on the EURO STOXX 50 Index.
Volatility derivatives are tradable products whose payoff depends on the volatility of the underlying assets. Examples of such products are volatility swaps and variance swaps.
Investors use volatility derivatives for benchmark strategies utilizing the EURO STOXX 50 Index, the nature of its negative correlation with the VSTOXX presents a viable way of avoiding benchmark-rebalancing costs. The statistical nature of volatility allows traders to perform mean-reverting strategies, dispersion trading, and volatility spread trading, among others. Recalculation of the index takes place every 5 seconds.
The ticker symbol for the VSTOXX is V2TX. VSTOXX Options and VSTOXX Mini Futures based on the VSTOXX Index trades on the Eurex Exchange.
Like the STOXX, the CBOE Volatility Index (VIX) measures the short-term volatility implied by S&P 500 stock index option prices. Many people around the world think of the VIX to be a popular measurement tool for the stock market volatility over the next 30-day period. The VIX recalculates every 15 seconds.
VIX Options and VIX Futures are based on the VIX and trades on the CBOE.