The Relevance of Cboe Volatility Index to Stock Markets in Emerging Economies

Jovita Ražauskaitė,Tamara MariničEvaitė

doi:10.15388/omee.2015.6.1.14229

Jovita Ražauskaitė, Tamara MariničEvaitė

Open Access

https://doi.org/10.15388/omee.2015.6.1.14229

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Abstract

We examine the capability of CBOE S&P500 Volatility index (VIX) to determine returns of emerging stock market indices as compared to local stock markets volatility indicators. Our study considers CBOE S&P500 VIX, local BRIC stock market volatility indices and BRIC stock market MSCI indices daily returns in the period from January 1, 2009 to September 30, 2014. Research is conducted in two steps. First, we perform Spearman correlation analysis between daily changes in CBOE S&P500 VIX, local BRIC stock market VIX and MSCI BRIC stock market indices returns. Second, we perform multiple regression analysis with ARCH effects to estimate the relevance of CBOE S&P500 VIX and local VIX in determining BRIC stock market returns. Research reports weak correlation between CBOE S&P500 VIX and local VIX (except for Brazil). Furthermore, results challenge the assumption of CBOE S&P500 VIX being an indicator of global risk aversion. We conclude that commonly documented trends of rising globalization and stock markets co-integration are not yet present in emerging economies, therefore the usage of CBOE S&P500 VIX alone in determining BRIC stock market returns should be considered cautiously, and local volatility indices should be accounted for in analysis. Furthermore, the data confirms the presence of safe haven properties in Chinese stock market index.

Highlights

Increase in globalization, countries liberalization and openness has rendered a strong interdependence between financial market dynamics across the globe
We argue that even in the context of recent financial markets globalization, openness and subsequent co-integration, stock markets in emerging economies do not fully reflect and absorb the effects of global market turmoil measured by VIXS&P, but rather are sensitive to local events
Correlation estimates between VIXS&P and Russian, Indian and Chinese stock markets appear to be low, entailing the absence of contagion effect in risk aversion stemming from US stock market

Summary

Introduction

Increase in globalization, countries liberalization and openness has rendered a strong interdependence between financial market dynamics across the globe. Recent financial crisis and its aftermath of volatility spillover effects evoked growing interest in market sentiment indicators measured by stock market volatility indices (VIX). As outlined by Gemmil et al (1997), shocks in stock markets implied VIX across financial markets are interrelated and may be employed as indicators of the rise in volatility in other markets. The latter summary of market turmoil contagion effect encourages investors to be more sensitive to market distortions and highly look up for market sentiment parameters and their transmission when considering portfolio diversification alternatives (Shiller, 2013). The extent to which stock price indices in developed and emerging countries are affected by volatility indicators “is important to the individual investor, the policy maker and forecaster, the researcher and more recently the investment banks that are specializing in new financial innovations to minimize risk” The extent to which stock price indices in developed and emerging countries are affected by volatility indicators “is important to the individual investor, the policy maker and forecaster, the researcher and more recently the investment banks that are specializing in new financial innovations to minimize risk” (Natarajan et al, 2013, p. 56)

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