The information content of implied volatility index (India VIX)

Abstract

This paper examines the predictive ability of India VIX as the best forecast of realized return volatility. This study takes into account the implied volatility index (India VIX), also known as the investors fear gauge index. We have employed OLS, 2SLS procedure and quantile regression to study the predictive power of implied volatility index. Empirical results show that India VIX is the best estimate of future realized return volatility. The Hausman specification test analyzes that implied volatility is measured with the errors; consequently, instrumental variable technique is used. The 2SLS estimation procedure shows that 2SLS estimates are more consistent than the simple OLS. Finally, the 2SLS procedure explains that historical volatility does not contain valuable information what already contained in the implied volatility. The implied volatility best subsumes the marketwide information to explain the future volatility. This study explains that Asian implied volatility indices also subsumes the information regarding the future volatility like the US and European volatility indices.

Macroeconomic Information and the Implied Volatility: Evidence from India VIX

“…However, the major findings of the study suggests that investors need not to consider the scheduled macroeconomic announcement except MCIR meeting day and one day after in the valuation of options pricing or financial planning due to the inefficiency of the Indian options market. These results are contradictory with the findings of Shaikh and Padhi [13] in the Indian context. The study can be extended in terms of response of India VIX for the economic news of Europe, US and other emerging economies.…”

“…To the best of knowledge, the Shaikh and Padhi [13] is the only study attempted to investigate the response of Implied Volatility Index towards the scheduled macroeconomic announcements in the Indian context. Using the Ordinary Least Squares (OLS) and Generalised Autoregressive Conditional Heteroscedasticity (GARCH) models, they found that IVIX rises significantly prior to the scheduled announcement and remains more stable on the new releases.…”

“…Meanwhile, in another study, Shaikh and Padhi [14] investigated the asymmetric contemporaneous relationship between India VIX and NIFTY Index and they proved that the changes in India VIX occur bigger for the negative return shocks than the positive returns shocks. In this situation, the application of GARCH-type models by Shaikh and Padhi [13] are mis-specified and lead to biased estimates of volatilities, as well as to inaccurate forecast intervals. To model the asymmetry in implied volatility index and allow the possibility to measure the different impact on the conditional variance of bad and good news, the Exponential Generalised Autoregressive Conditional Heteroscedasticity (EGARCH) model offered by Nelson [15] and Engle et al [16] was used in the present study to investigate the behavior of India VIX during, before and after the scheduled macroeconomic news release.…”

“…reporting day, one day before and one day after the announcement of macroeconomic news, respectively. Based on the study of Ederington and Lee [5], Nikkinen and Sahlstrom [13] and Chen and Clements [3], we expect that during the non-announcements days, the VIX rises hence intercept (α 0 ) should be non-zero and positive, and also should be statistically significant. On the scheduled macroeconomic news release day, the VIX should go down, and goes its normal level, as it impounds the information dis- and INFLATION on the report day are found to be insignificant.…”

Linkage between India Implied Volatility Index and Stock Index Returns

“…However, the studies in the context of Indian stock market are found to be meager. To the best of knowledge, Shaikh and Padhi [19] is the only study attempted to investigate the asymmetric contemporaneous linkage between India VIX and NIFTY Index and they established linkage is negative and asymmetric. In another study, Shaikh and Padhi [19] investigated the behaviour of India VIX during, before and after the scheduled macroeconomic news release and they implicitly assumed the symmetric behaviour of market reactions towards positive and negative shocks.…”