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Discerning lead-lag between fear index and realized volatility

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  • Wahab, Fatin Farhana
  • Masih, Mansur

Abstract

In theory, historical volatility gauges the fluctuations of underlying assets or securities by monitoring changes in price over predetermined time period, while implied volatility looks into the future in its attempts to forecast the movement of the asset’s price based on current ones. Option trader tends to combine both volatilities with realized volatility serving as the baseline and implied volatility redefining the relative values of the options. Henceforth, the purpose of this study is twofold; first is to investigate the nature of lead-lag between the ‘fear index’ (VIX) and its corresponding realized volatility (RVI) of S&P 500 indices. Second, we examine the dynamic analysis of implied volatility transmission across inter-market correlation with newly adapted volatility indices from CBOE, VIX, OVX and GVZ to indicate which market is leading. Contrary to the popular perception, the paper finds that S&P 500 implied volatility is lagging its historical variance markedly, and surprisingly even its price index is leading the implied volatility as well. The study also concludes that Gold spearheads the market with stocks being the most sensitive to shocks. Our findings have clear policy implications for trading strategies and using volatilities in risk management.

Suggested Citation

  • Wahab, Fatin Farhana & Masih, Mansur, 2017. "Discerning lead-lag between fear index and realized volatility," MPRA Paper 79433, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:79433
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    References listed on IDEAS

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    Cited by:

    1. Jeng-Bau Lin & Wei Tsai, 2019. "The Relations of Oil Price Change with Fear Gauges in Global Political and Economic Environment," Energies, MDPI, vol. 12(15), pages 1-17, August.

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    More about this item

    Keywords

    implied volatility; realized volatility; inter-market correlation; VIX; OVX; GVZ;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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