The daily rise and fall of the VIX1D: Causes and solutions of its overnight bias

Stefan Albers and Lars N. Kestner

Finance Research Letters, 2024, vol. 62, issue PA

Abstract: This paper explores the unique intraday dynamics of the VIX1D. We identify a distinct overnight bias, that causes the index to consistently rise during trading hours and to fall overnight. This bias stems from the index’s calculation methodology, particularly the use of business time and dynamic weighting of next-term options, which include overnight variance risk premiums. It overlaps with and is more pronounced than the day-of-the-week effect. To mitigate this bias, we propose data filtering and revising the calculation method to a forward-starting variance. These solutions aim to enhance the VIX1D’s interpretability and reliability for risk assessment in financial markets.

Keywords: VIX1D; Implied volatility; Intraday pattern; Overnight bias; Day-of-the-week effect (search for similar items in EconPapers)
JEL-codes: C58 G14 G17 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324002162

DOI: 10.1016/j.frl.2024.105186

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