The VIX and VXN volatility measures: Fear gauges or forecasts?

Abstract

This paper examines the behaviour of the ‘VXO’, previously called the ‘VIX’, and ‘VXN’ measures of the volatility implied by stock index options. From the mid-1990s to the end of 2002, the volatility measures seem to reflect both sentiment associated with market declines (‘fear’) and imminent actual volatility. There is a stark difference between the early and late parts of that time interval, however. Prior to the Russian default in August 1998, the volatility measures do not forecast imminent stock index volatility; the VXO in this early period seems to be reflective of investor fear. In the interval after the Russian default, however, both the VXO and the VXN reflect future volatility rather than investor fear.