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Generalized Correlation Measures of Causality and Forecasts of the VIX Using Non-Linear Models

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  • David E Allen

    (School of Mathematics and Statistics, University of Sydney, Camperdown, NSW 2006, Australia
    Department of Finance, Asia University, Taichung 41354, Taiwan
    School of Business and Law, Edith Cowan University, Edith Cowan University, Joondalup 6027, Australia)

  • Vince Hooper

    (School of Economics and Management, Xiamen University, 43900 Sepang, Selangor Darul Ehsan, Malaysia)

Abstract

This paper features an analysis of causal relations between the daily VIX, S&P500 and the daily realised volatility (RV) of the S&P500 sampled at 5 min intervals, plus the application of an Artificial Neural Network (ANN) model to forecast the future daily value of the VIX. Causal relations are analysed using the recently developed concept of general correlation Zheng et al. and Vinod. The neural network analysis is performed using the Group Method of Data Handling (GMDH) approach. The results suggest that causality runs from lagged daily RV and lagged continuously compounded daily return on the S&P500 index to the VIX. Sample tests suggest that an ANN model can successfully predict the daily VIX using lagged daily RV and lagged daily S&P500 Index continuously compounded returns as inputs.

Suggested Citation

  • David E Allen & Vince Hooper, 2018. "Generalized Correlation Measures of Causality and Forecasts of the VIX Using Non-Linear Models," Sustainability, MDPI, vol. 10(8), pages 1-15, August.
    • Handle: RePEc:gam:jsusta:v:10:y:2018:i:8:p:2695-:d:161253
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    References listed on IDEAS

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    1. Tim Bollerslev & George Tauchen & Hao Zhou, 2009. "Expected Stock Returns and Variance Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4463-4492, November.
    2. Bekaert, Geert & Hoerova, Marie, 2014. "The VIX, the variance premium and stock market volatility," Journal of Econometrics, Elsevier, vol. 183(2), pages 181-192.
    3. N. Baba & Y. Sakurai, 2011. "Predicting regime switches in the VIX index with macroeconomic variables," Applied Economics Letters, Taylor & Francis Journals, vol. 18(15), pages 1415-1419.
    4. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    5. Fernandes, Marcelo & Medeiros, Marcelo C. & Scharth, Marcel, 2014. "Modeling and predicting the CBOE market volatility index," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 1-10.
    6. Shurong Zheng & Ning-Zhong Shi & Zhengjun Zhang, 2012. "Generalized Measures of Correlation for Asymmetry, Nonlinearity, and Beyond," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 107(499), pages 1239-1252, September.
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    Citations

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    Cited by:

    1. Hrishikesh D. Vinod & P. M. Rao, 2019. "Externalities from Intra-Firm Trade by U.S. Multinationals," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(4), pages 389-397, November.
    2. Rituparna Sen & Anandamayee Majumdar & Shubhangi Sikaria, 2022. "Bayesian Testing of Granger Causality in Functional Time Series," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(1), pages 191-210, September.
    3. H. D. Vinod, 2022. "Generalized, Partial and Canonical Correlation Coefficients," Computational Economics, Springer;Society for Computational Economics, vol. 60(4), pages 1479-1506, December.
    4. Rituparna Sen & Anandamayee Majumdar & Shubhangi Sikaria, 2021. "Bayesian Testing Of Granger Causality In Functional Time Series," Papers 2112.15315, arXiv.org.
    5. Maithili S. Naik & Y.V. Reddy, 2021. "India VIX and Forecasting Ability of Symmetric and Asymmetric GARCH Models," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(3), pages 252-262, March.
    6. David E. Allen, 2022. "Cryptocurrencies, Diversification and the COVID-19 Pandemic," JRFM, MDPI, vol. 15(3), pages 1-25, February.
    7. David E. Allen & Michael McAleer, 2018. "“Generalized Measures of Correlation for Asymmetry, Nonlinearity, and Beyond”: Comment," Documentos de Trabajo del ICAE 2018-23, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    8. Hrishikesh Vinod, 2023. "Causality Estimation in Panel Data," Fordham Economics Discussion Paper Series dp2023-09er:dp2023-09, Fordham University, Department of Economics.
    9. Han Lin Shang & Kaiying Ji & Ufuk Beyaztas, 2021. "Granger causality of bivariate stationary curve time series," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(4), pages 626-635, July.

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    Keywords

    GMC; VIX; RV5MIN; causal path; ANN;
    All these keywords.

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