English

Abstract

Since VIX was launched in 2003, volatility indices have mushroomed in equity markets across the five continents. This paper characterizes the methodology that is currently used for the construction of volatility indices and summarizes the up-to-date academic research on their applications and salient features by considering a wide set of volatility indices belonging to different geographic areas (for example, US, Germany, Japan, or Australia, among others). The literature review suggests that overall volatility indices outperform predictions of future realized volatility based on past standard deviations, the lagged realized volatility, or the GARCH family of conditional volatility models; volatility indices can be considered investor’s gauges of fear of their respective stock markets; and there is evidence of volatility contagion across continents. Findings have implications for stock and option portfolio managers. We also identify some unexplored volatility indices and suggest some directions of future research.   Key words: Implied volatility, stock index options, volatility indices.