Modeling and predicting the CBOE market volatility index

Marcelo Fernandes, Marcelo Medeiros (marcelom@illinois.edu) and Marcel Scharth (marcel.scharth@sydney.edu.au)

No 548, Textos para discussão from Department of Economics PUC-Rio (Brazil)

Abstract: This paper performs a thorough statistical examination of the time-series properties of the market volatility index (VIX) from the Chicago Board Options Exchange (CBOE). The motivation lies on the widespread consensus that the VIX is a barometer to the overall market sentiment as to what concerns risk appetite. To assess the statistical behavior of the time series, we run a series of preliminary analyses whose results suggest there is some long-range dependence in the VIX index. This is consistent with the strong empirical evidence in the literature supporting long memory in both options-implied and realized volatilities. We thus resort to linear and nonlinear heterogeneous autoregressive (HAR) processes, including smooth transition and threshold HAR-type models, as well as to smooth transition autoregressive trees (START) for modeling and forecasting purposes. The in-sample results for the HAR-type indicate that they cope with the long-range dependence in the VIX time series as well as the more popular ARFIMA model. In addition, the highly nonlinear START specification also does a god job in controlling for the long memory. The out-of-sample analysis evince that the linear ARMA and ARFIMA models perform very well in the short run and very poorly in the long-run, whereas the START model entails by far the best results for the longer horizon despite of failing at shorter horizons. In contrast, the HAR-type models entail reasonable relative performances in most horizons. Finally, we also show how a simple forecast combination brings about great improvements in terms of predictive ability for most horizons.

Keywords: heterogeneous autoregression; implied volatility; smooth transition; VIX. (search for similar items in EconPapers)
JEL-codes: C22 C53 E44 G12 (search for similar items in EconPapers)
Pages: 35p
Date: 2007-08
New Economics Papers: this item is included in nep-cfn, nep-for, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Modeling and predicting the CBOE market volatility index (2014)
Working Paper: Modeling and predicting the CBOE market volatility index (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:rio:texdis:548

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