AVIX: An Improved VIX Based on Stochastic Interest Rates and an Adaptive Screening Mechanism

Abstract

An improved model-free implied variation index (AVIX) is proposed in this article. The AVIX is developed under a generalized semi-martingale process with stochastic interest rates. An adaptive option screening mechanism is proposed to accommodate different market conditions. The effect of dividend protection is also considered. An empirical study of the China 50 ETF option market suggests that the AVIX is a better barometer of aggregate implied variation and investor sentiment than the traditional VIX. It reacts to market changes more rapidly and more sensitively. The AVIX also contains more information about future volatility and provides a more efficient forecast of future realized volatility.

Volatility index and the return–volatility relation: Intraday evidence from Chinese options market

“…We find that iVX has a strong forecasting power for realized volatility of its underlying ETF market in the short term, particularly during market declines. Besides, the intraday iVX is positively related to the underlying price in our full sample, which is consistent with the daily results of Zheng et al () using iVIX. Further, we examine whether investor structure plays a role in the positive correlations by comparing iVX and VXFXI (CBOE China ETF Volatility Index) .…”

“…If Hypothesis were to hold after being tested with high‐frequency data, we would observe results similar to those in Zheng et al (). More important, we highlight the correlations between iVX and negative returns of the SSE 50 ETF, and use a series of subsample analyses during the large drops to yield more details.…”

“…Referring to the literature, Zheng et al () find that daily iVIX is positively related to the price of the SSE 50 ETF. And they claim that in China, iVIX should be referred to as the “greed index” rather than the “fear index.” We revisit this issue with the intraday iVX index.…”

“…While the CBOE VIX index is often referred to as the investors’ fear gauge (e.g., Whaley, ), whether the SSE iVX is a “fear index” or a “greed index” is an open question. Zheng et al () find that daily iVIX is positively related to the price of the SSE 50 ETF. They think that in China the iVIX should be referred to as a “greed index” rather than a “fear index.” In this paper, we revisit this issue with intraday iVX data and propose the following:…”

“…To the best of our knowledge, there has been little research on the newly released Chinese volatility index. One exception is a study by Zheng, Jiang, and Chen (), in which they find that daily iVIX is positively related to the price of the SSE 50 ETF. They argue that iVIX should be referred to as the “greed index” rather than the “fear index,” a term often used to describe VIX (Whaley, ).…”