Do short-term market swings improve realized volatility forecasts?

Abstract

CBOE recently introduced a new volatility index, VIX1D. This paper aims to provide a concise evaluation of the effectiveness of this new index that reflects short-term market swings in predicting realized volatility. Similar to VIX, VIX1D exhibits a positive relationship with future realized volatility. When incorporated into HAR-RV, VIX1D demonstrates considerably enhanced predictive capability compared to VIX for one-day ahead predictions, as confirmed by various out-of-sample analyses. Additionally, the predictive capacity of VIX1D diminishes more rapidly compared to that of VIX. These findings validate that short-term swings significantly improve the forecast of short-term realized volatility.