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Breaking VIX at open: Evidence of uncertainty creation and resolution

Author

Listed:
  • Chen, Jingjing
  • Jiang, George J.
  • Yuan, Chaowen
  • Zhu, Dongming

Abstract

We decompose daily (close-to-close) changes of VIX into overnight (close-to-open) and trading-hour (open-to-close) changes. Consistent with the notion that non-trading creates uncertainty and trading resolves uncertainty, we find that on average VIX increases overnight and decreases during trading hours. More importantly, we document an important seasonality in VIX, i.e., the non-trading day effect. Overnight increase of VIX involving weekends or holidays is significantly higher than that over two consecutive trading days. We also document that VIX exhibits a clear pattern around pre-scheduled overnight and trading-hour macroeconomic announcement. Finally, we show that breaking VIX changes into overnight and trading-hour components and incorporating the non-trading day effect lead to not only significant improvements in in-sample fitting but also superior performance of out-of-sample-forecasting and active trading strategies.

Suggested Citation

  • Chen, Jingjing & Jiang, George J. & Yuan, Chaowen & Zhu, Dongming, 2021. "Breaking VIX at open: Evidence of uncertainty creation and resolution," Journal of Banking & Finance, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:jbfina:v:124:y:2021:i:c:s0378426621000182
    DOI: 10.1016/j.jbankfin.2021.106060
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    Citations

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    Cited by:

    1. Qadan, Mahmoud & Nisani, Doron & Eichel, Ron, 2022. "Irregularities in forward-looking volatility," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 489-501.
    2. George J. Jiang & Guanzhong Pan, 2022. "Speculation or hedging?—Options trading prior to FOMC announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(2), pages 212-230, February.
    3. Huang, Hong-Gia & Tsai, Wei-Che & Weng, Pei-Shih & Yang, J. Jimmy, 2023. "Intraday momentum in the VIX futures market," Journal of Banking & Finance, Elsevier, vol. 148(C).

    More about this item

    Keywords

    VIX index; Uncertainty creation; Uncertainty resolution; Macroeconomic announcements; Out-of-sample forecasts; Trading strategy;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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