On the relationship between implied volatility index and equity index returns
Abstract
Purpose
The purpose of this paper is to analyze the asymmetric contemporaneous relationship between implied volatility index (India VIX) and Equity Index (S & P CNX Nifty Index). In addition, the study also analyzes the seasonality of implied volatility index in the form of day-of-the-week effects and option expiration cycle.
Design/methodology/approach
This study employs simple OLS estimation to analyze the contemporaneous relationship among the volatility index and stock index. In order to obtain robust results, the analysis has been presented for the calendar years and sub-periods. Moreover, the international evidenced presented for other Asian markets (Japan and China).
Findings
The empirical evidences reveal a strong persistence of asymmetry among the India VIX and Nifty stock index, at the same time the magnitude of asymmetry is not identical. The results show that the changes in India VIX occur bigger for the negative return shocks than the positive returns shocks. The similar kinds of results are recorded for the Japan and China volatility index. Particularly, the analysis also supports that India VIX holds seasonality, on the market opening VIX observed to be at its high level, and on the subsequent days it remains low. The results on the options expiration unfold the facts that India VIX remains more normal on the day of expiration.
Practical implications
The asymmetric relation and seasonal patterns are quite useful to the volatility traders to price the financial assets when market trades in the high- and low-volatility periods.
Originality/value
There is a lack of studies of this kind in the context of emerging markets like India; hence, this is an attempt in this direction. The study provides an insight to the NSE to launch some derivative products (i.e. F & Os) on India VIX that can generate more liquidity in the market for the volatility traders.
Keywords
Citation
Shaikh, I. and Padhi, P. (2016), "On the relationship between implied volatility index and equity index returns", Journal of Economic Studies, Vol. 43 No. 1, pp. 27-47. https://doi.org/10.1108/JES-12-2013-0198
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited