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A simple expected volatility (SEV) index

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  • Wiphatthanananthakul, C.
  • McAleer, M.J.

Abstract

In 1993, the Chicago Board Options Exchange (CBOE) introduced the Volatility Index, VIX, based on S&P100 options (OEX), which quickly became the benchmark for stock volatility. As VIX is based on real-time option prices, it reflects investors’ consensual view of future expected stock market volatility. In 2003, CBOE made two key enhancements to the VIX methodology. The New VIX is based on an up-to-the-minute market estimation of expected volatility that is calculated by using real-time S&P500 Index (SPX) option bid/ask quotes and a wider range of strike prices rather than just at-the-money series with the market’s expectation of 30-day volatility and using nearby and second-nearby options. The new VIX methodology may appear to be based on a complicated formula to calculate expected volatility. In this paper, with the use of SET50 Index Options data, we simplify the apparently complicated expected volatility formula to a simple relationship, which has a higher negative correlation between the VIX for Thailand (TVIX) and SET50 Index Options.

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Bibliographic Info

Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 2008-35.

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Date of creation: 01 Dec 2008
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Handle: RePEc:ems:eureir:13992

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  1. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm54, Yale School of Management.
  2. Blair, Bevan J. & Poon, Ser-Huang & Taylor, Stephen J., 2001. "Forecasting S&P 100 volatility: the incremental information content of implied volatilities and high-frequency index returns," Journal of Econometrics, Elsevier, vol. 105(1), pages 5-26, November.
  3. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-28, June.
  4. Ser-Huang Poon & Peter, F. Pope, 2000. "Trading volatility spreads: a test of index option market efficiency," European Financial Management, European Financial Management Association, vol. 6(2), pages 235-260.
  5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  6. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. " Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-49, December.
  7. Dennis, Patrick & Mayhew, Stewart & Stivers, Chris, 2006. "Stock Returns, Implied Volatility Innovations, and the Asymmetric Volatility Phenomenon," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(02), pages 381-406, June.
  8. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
  9. Beckers, Stan, 1981. "Standard deviations implied in option prices as predictors of future stock price variability," Journal of Banking & Finance, Elsevier, vol. 5(3), pages 363-381, September.
  10. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm65, Yale School of Management.
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