This paper explores the information content and the forecasting power of the VIX Index, computed by CBOE, on two different levels. First, the expected 30-day volatility implicit in the index level is compared to the realized volatility measurements. Then, VIX is used to compute value-at-risk for a hypothetical portfolio replicating Standard and Poor’s 500 Index and the measure is backtested against actual losses. In both tests, the total period of 20 years (January 1995-December 2014) is split into two sub-periods, precisely before and after March 2006, i.e the introduction of option contracts on the VIX index. The results are not clear-cut. The VIX index shows strong information content, but is an upward biased forecast of realized performance. Its information content seems unaffected by the event of becoming a negotiable asset. When used to compute value-at-risk, however, the measures based on VIX are less effective especially in periods of higher volatility.

The VIX index: forecasting power and performance in a risk management framework

BONGIOVANNI, ALESSIO;DE VINCENTIIS, Paola;ISAIA, Eleonora
2016

Abstract

This paper explores the information content and the forecasting power of the VIX Index, computed by CBOE, on two different levels. First, the expected 30-day volatility implicit in the index level is compared to the realized volatility measurements. Then, VIX is used to compute value-at-risk for a hypothetical portfolio replicating Standard and Poor’s 500 Index and the measure is backtested against actual losses. In both tests, the total period of 20 years (January 1995-December 2014) is split into two sub-periods, precisely before and after March 2006, i.e the introduction of option contracts on the VIX index. The results are not clear-cut. The VIX index shows strong information content, but is an upward biased forecast of realized performance. Its information content seems unaffected by the event of becoming a negotiable asset. When used to compute value-at-risk, however, the measures based on VIX are less effective especially in periods of higher volatility.
JOURNAL OF FINANCIAL MANAGEMENT, MARKETS AND INSTITUTIONS
4
2
129
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http://jfmi.univpm.it/index.php/jfmi
VIX, implied volatility, value-at-risk, volatility forecasting
Bongiovanni Alessio; De Vincentiis Paola; Isaia Eleonora
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/2318/1624212
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