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Non-linear dynamics in financial asset returns: the predictive power of the CBOE volatility index


  • Stelios Bekiros
  • Dimitris Georgoutsos


In this paper we attempt to predict the direction of change of the S&P500 index over the period 8 April 1998 to 5 February 2002 by means of a recurrent neural network (RNN). We demonstrate that the incorporation in the trading rule of the Chicago Board Options Exchange (CBOE) volatility index changes strongly enhances its profitability during 'bear' market periods. This improvement is measured in comparison with a RNN including changes of estimated conditional volatility measures, a linear autoregressive model as well as to a buy-and-hold strategy. We suggest a number of theories that are consistent with our findings.

Suggested Citation

  • Stelios Bekiros & Dimitris Georgoutsos, 2008. "Non-linear dynamics in financial asset returns: the predictive power of the CBOE volatility index," The European Journal of Finance, Taylor & Francis Journals, vol. 14(5), pages 397-408.
  • Handle: RePEc:taf:eurjfi:v:14:y:2008:i:5:p:397-408 DOI: 10.1080/13518470802042203

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    References listed on IDEAS

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    Cited by:

    1. Dungey, Mardi & Milunovich, George & Thorp, Susan, 2010. "Unobservable shocks as carriers of contagion," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1008-1021, May.
    2. Yang-Cheng Lu & Yu-Chen Wei & Chien-Wei Chang, 2012. "Nonlinear Dynamics Between the Investor Fear Gauge and Market Index in the Emerging Taiwan Equity Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 171-191, January.
    3. Yang-Cheng Lu & Yu-Chen Wei & Chien-Wei Chang, 2012. "Nonlinear Dynamics Between the Investor Fear Gauge and Market Index in the Emerging Taiwan Equity Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 171-191, January.
    4. Luis H. R. Alvarez E. & Paavo Salminen, 2016. "Timing in the Presence of Directional Predictability: Optimal Stopping of Skew Brownian Motion," Papers 1608.04537,


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