Changes In VIX Research Articles

A Non-Parametric and Entropy Based Analysis of the Relationship between the VIX and S&P 500

This paper features an analysis of the relationship between the S&P 500 Index and the VIX using daily data obtained from the CBOE website and SIRCA (The Securities Industry Research Centre of the Asia Pacific). We explore the relationship between the S&P 500 daily return series and a similar series for the VIX in terms of a long sample drawn from the CBOE from 1990 to mid 2011 and a set of returns from SIRCA’s TRTH datasets from March 2005 to-date. This shorter sample, which captures the behavior of the new VIX, introduced in 2003, is divided into four sub-samples which permit the exploration of the impact of the Global Financial Crisis. We apply a series of non-parametric based tests utilizing entropy based metrics. These suggest that the PDFs and CDFs of these two return distributions change shape in various subsample periods. The entropy and MI statistics suggest that the degree of uncertainty attached to these distributions changes through time and using the S&P 500 return as the dependent variable, that the amount of information obtained from the VIX changes with time and reaches a relative maximum in the most recent period from 2011 to 2012. The entropy based non-parametric tests of the equivalence of the two distributions and their symmetry all strongly reject their respective nulls. The results suggest that parametric techniques do not adequately capture the complexities displayed in the behavior of these series. This has practical implications for hedging utilizing derivatives written on the VIX.

Expected VIX Option Returns

We dissect the fine structure of volatility risks, as an important component of time-varying investment opportunities, by studying returns on VIX option portfolios. In particular, we provide model-free evidence regarding the two leading channels in modeling volatility risks: stochastic volatility-of-volatility and volatility jumps. We find that zero-delta straddles and delta-hedged portfolios of VIX options, which are neutral to changes in VIX but sensitive to volatility-of-volatility, underperform zero. In contrast, tail portfolios, which we construct by out-of-the-money and at-the-money VIX options and are only sensitive to tails risks of volatility, outperform zero. Therefore, risks in volatility-of-volatility and jump-induced volatility tails are priced, providing empirical support for both of the two leading channels. We further construct measures for volatility-of-volatility and volatility tail risks, by the whole set of out-of-the-money VIX options, to understand how they are priced relative to variance and equity risk premiums. We find that both measures predict short-horizon market returns, with the predictability from volatility-of-volatility risks subsumed by the variance premium but the volatility tail risk standing as a separate channel. Different from existing tail risk measures of merely market returns, our volatility tail index provides important information regarding how investors gauge the extreme volatility risks.

What Makes the VIX Tick?

We study the minute-by-minute behavior of the VIX index and trading activity in the underlying S&P 500 options market. VIX squared tends to increase around times of macroeconomic news releases. The response of VIX squared to short maturity interest rate futures is consistent with credibility of Fed monetary stimulus increasing once the credit crisis was resolved. However, changes in VIX squared are largely explained by negative responses to its own shocks, which we explore with tick data from the index options markets and theories of liquidity provision and positive feedback trading.

VIX changes and derivative returns on FOMC meeting days

We examine the link between scheduled Federal Open Market Committee (FOMC) meetings and the VIX measure. Our results indicate that VIX declines significantly on scheduled meeting dates. Unlike prior studies suggesting that the drop in VIX is mechanical, we attribute the decline to the resolution of uncertainty regarding future interest rates provided by the meetings. We examine returns to investable positions on VIX. Though a decline in the VIX level commonly occurs on FOMC meeting dates, we find that significant returns may still be garnered from taking short-VIX positions in derivative markets, even after accounting for the bid-ask spread.

Day of the Week Effect on VIX: A Parsimonious Representation

The study of significant deterministic seasonal patterns in financial asset returns is of high importance to academia and investors. This paper analyzes the presence of seasonal daily patterns in the VIX and S&P 500 returns series using a trigonometric specification. First, we show that, given the isomorphism between the trigonometrical and alternative seasonality representations (i.e. daily dummies) it is possible to test daily seasonal patterns employing a trigonometrical representation based on a finite sum of weighted sines and cosines. We find a potential evolutive seasonal pattern in the daily VIX that is not in the daily S&P 500 log-returns series. In particular, we find an inverted Monday effect in VIX level and changes, and a U-shaped seasonal pattern in VIX changes when we control for outliers. The trigonometrical representation is more robust to outliers than the one commonly used by the literature, but it is not immune to them. Finally, we do not find a day-of-the-week effect in S&P 500 returns series, what suggests the presence of a deterministic seasonal pattern in the relation between VIX and S&P 500 returns.

Six: Proposing the Alternative Skewness Index

In this study, we propose as a new forward-looking index of negative market skew derived from state-preference pricing. Specifically, SIX is a forecast of the ratio of lower to upper partial moment volatility over a 30-day horizon, for SPX market returns. Using SPX options data from 1996 to 2013, we conduct a comparison between SIX and the CBOE SKEW index. First, we document that the daily change in VIX and SIX (SKEW) are negatively (positively) related. Second, we show that the daily change of SIX (SKEW) adds (does not add) significant explanatory power for predicting the one-day ahead return. Third, though biased, SIX produces an efficient forecast of future physical skewness. In contrast, there is no statistically significant relationship between SKEW and physical skewness. Collectively, our results suggest that as an indicator of institutional anxiety, both theoretically and in practice, SIX (SKEW) is a more than useful (questionable) complement to VIX

What Makes the VIX Tick?

We seek the roots of one-minute changes in VIX, an index of S&P 500 option prices, to understand risk neutral volatility and its risk premium component. Beyond leverage and risk premium effects, macroeconomic influences and some proxies for noise trading in the S&P 500 ETF market are significant, though measures of small investor sentiment have little significance. VIX changes display negative serial correlation suggesting liquidity provision in the options market. Temporary price effects are observed around macroeconomic news releases. Though often viewed as an exogenous state variable, a significant portion of VIX variability relates to trader behavior and macroeconomic fundamentals.

Measuring investor sentiment with mutual fund flows

We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of “noise” in aggregate market prices induced by investor sentiment.

Is gold still a shelter to fear?

Finance theory argues that when financial markets drop, substitute investments, like gold, rise. Differently from previous works, in this study we have an initial attempt to link fear gauge index, commonly known as the VIX, to gold price in order to test whether gold price is motivated by the VIX or the vice versa. We employ a recent data from the U.S., and find that in stable periods there exists a bi-directional causality between fear and gold prices, whereas during non-stable periods (such as the current market crises) it seems that gold price returns drive the VIX changes. Both findings support the claim that gold still the shelter to fear.

Relationships Between Implied Volatility Indexes and Stock Index Returns

There is a negative and statistically significant relationship between the returns of the S&P 100 and the Nasdaq 100 stock indexes and their corresponding implied volatility indexes, VIX and VXN. For the S&P 100, the relationship is asymmetric, as negative stock index returns are more associated than positive returns with greater changes in VIX. VIX changes when negative stock index returns are observed are greater in low–volatility periods. For the Nasdaq 100, the asymmetric effect is rather weak, but the VXN and underlying index co–movement is also somewhat muted in high–volatility trading environments. There is some evidence that positive forward–looking returns are to be expected for long positions triggered by extremely high levels of the implied volatility indexes.