Study on the relationship between the IVol-BR and the future returns of the Brazilian stock market,

Paloma Vanni Cainelli,Marcelo Cabús Klötzle,Antonio Carlos Figueiredo Pinto

doi:10.1590/1808-057x202009890

Paloma Vanni Cainelli, Marcelo Cabús Klötzle + Show 1 more

Open Access

https://doi.org/10.1590/1808-057x202009890

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Abstract

ABSTRACT In 2015, the Financial Economics Research Center (NEFIN) of the University of São Paulo proposed an implicit volatility index for the Brazilian stock market based on the daily prices of options for the Bovespa index (Ibovespa) and that measures the expected volatility of the Ibovespa in the next two months. The aim of this study is to determine whether this implicit volatility index can be considered an antecedent indicator of future returns of the Brazilian stock market, given that it represents the expected volatility of the Ibovespa two months into the future. This study contributes to the literature on the implicit volatility index for the Brazilian stock market, which has been scarce until now. This happens due to the recent establishment of the index and due to the fact that there is not an official one published by the B3 S.A. - Brasil, Bolsa, Balcão (B3). Given the relationship found between the Brazilian implicit volatility index and the future returns of the Ibovespa, investors could anticipate instabilities in the Brazilian market by putting together strategies to protect their investment portfolios, as well as identifying opportunities to enter and exit the market. This research corroborates in disclosing the Brazilian implicit volatility index in order for it to become more widely used in academia and in the Brazilian financial market. The increase in studies on this index may also incentivize the launch of an official implicit volatility index by the B3. The relationship between the Brazilian implicit volatility index and the future returns of the Ibovespa is examined using least squares and quantile regressions. The implicit volatility index for the Brazilian stock market could help in predicting the future returns of the Ibovespa, especially for 20-, 60-, 120-, and 250-day future returns.

Highlights

Implicit volatility indices based on options prices emerged after the establishment, in 1973, of the first exchange for trading listed options, the Chicago Board Options Exchange (CBOE) (Fernandes et al, 2014)
In intention with this study is to extend the work of Astorino et al (2017), broadening the knowledge on the IVol-BR and its relationship with the future returns of the Ibovespa
The results obtained in this study reveal that the IVol-BR can help in predicting the future returns of the Ibovespa, especially for 20, 60, 120, and 250-day future returns

Summary

Introduction

Implicit volatility indices based on options prices emerged after the establishment, in 1973, of the first exchange for trading listed options, the Chicago Board Options Exchange (CBOE) (Fernandes et al, 2014). Following the example of the CBOE, other financial markets have established their own implicit volatility indices, for example the VDAX in Germany for the DAX 30 German stock exchange index and the VFTSE in the United Kingdom for the FTSE100 British stock exchange index, among others. Due to the importance of measuring the expected movements of the Brazilian stock market, the Financial Economics Research Center (NEFIN) of the University of São Paulo (USP) proposed, in 2015, an implicit volatility index, the IVol-BR, based on the daily prices of the options for the Bovespa index (Ibovespa) and that measures the expected volatility of the Ibovespa in the two months. The details of the IVol-BR calculation can be found on the NEFIN website (http://www.nefin.com.br)

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