Abstract
VIX, a ticker symbol for Volatility Index, measures the implied annual volatility of at-the-money SP500 Index Options. Conventional wisdom presumes VIX to measure the magnitude (positive or negative) of possible movements in future equity prices, with movements being a positive function of VIX. This research investigates the nature of the relationship between VIX and SP500 volatility, and answers the question as to whether that relationship is linear or nonlinear. Based on this research paper, the authors conclude that the realized SP500 volatility is nonlinear, and grows with the level of VIX at an increasing rate. The nonlinearity relationship between VIX and SP500 has enormous implications for investment management and hedging in the financial markets.
Highlights
VIX, a ticker symbol for Chicago Board Options Exchange Volatility Index, measures the implied 30-day volatility of at-the-money SP500 Index Options
The results present a third set of evidence of the The fourth and last set of evidence supporting the nonlinear relationship between SPR and VIX
This research concludes that the current VIX level does serve as a proxy for future SP500 volatility, but that the SP500 return volatility increases at an increasing rate with previous period VIX
Summary
On the non-linear relationship between VIX and realized SP500 volatility. Investment Management and Financial Innovations, 14(2-1), 200-206.
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