Study of Association between Volatility Index and Nifty using VECM

Abstract

Volatility in capital markets is the measure degree of variability of stock return from their expected return. The volatility in the capital market is the basis for price discovery in the financial asset. The volatility index (VIX) is the measurement index of the volatility of the capital market. It is the fear index of the capital market. The concept is first coined in 1993 in Chicago Board Options Exchange (CBOE). In India, such an index was introduced in 2008 by NSE. India VIX calculates the expected market volatility over the coming thirty days on Nifty Options. It Market index is the performance metric of the Indian capital market. This index is designed to reflect the overall market sentiments. An index is an important parameter to measure the performance of the economy as a whole. While the market index measures the direction of the market and is calculated by the price movements of the underlying stocks, the Volatility Index measures the volatility of the market and is calculated using the order book of the underlying index's options. In this study, we examine the association between India VIX and Nifty Index returns by using Johanson's co-integration, Vector Error Correction Model (VECM), and Granger causality Tools. The data for this study covers closing data of VIX value and Nifty closing value from January 2014 to December 2019 and has a total of 1474 daily observations. The result confirms that there are co-integrating relationships (long-run association) between VIX and Nifty. The Granger causality indicates Nifty does Granger Cause VIX but VIX does not granger Cause Nifty.