Abstract

Why the VOLAX future has failed

Ralf Herrmann and Torsten Luedecke

Universität Karlsruhe

On January 19, 1998 the German Futures and Options Exchange (DTB) has launched the VOLAX future as a futures contract on the three-month implied volatility of an at-the-money DAX option. The underlying instrument for the new contract is a weighted average of the VDAX volatility subindices which are calculated by Deutsche Boerse AG since July 1997. Despite the theoretically appealing features of an implied volatility contract as an instrument to manage volatility risk, the VOLAX future failed to attract significant volume. The peak-volume occured in the second month of trading and was followed by a strong decline in volume reaching zero in September 1998. Due to the existence of designated market makers in the first months of trading, liquidity was provided at low costs measured by the size of explaining the futures contract's failure. The paper provides an empirical analysis of the complete trading history of the VOLAX future comprising intradaily data on trades and quotes and gives a variety of reasons which may explain the failure of the new contract.