Investigating the spillover effect of implied volatility on nifty return in different time periods with reference to index options: a multivariate GARCH approach

Bhakti Bhushan Mishra (), Namita Sahay () and Preeti Sharma ()
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Bhakti Bhushan Mishra: Amity University Noida
Namita Sahay: Amity University Noida
Preeti Sharma: Sharda University

International Journal of System Assurance Engineering and Management, 2025, vol. 16, issue 6, No 1, 1993-2004

Abstract: Abstract This research paper aims to explores the relationship between the Implied Volatility Index (India VIX) and Nifty returns in the different time periods- daily, weekly, and monthly, focusing on the spillover effects over a fifteen-year period. The study employs Generalized Autoregressive Conditional Heteroskedasticity (GARCH), Dynamic Conditional Correlation (DCC), and Vector Autoregressive (VAR) models to assess the effect of India VIX on Nifty index returns. Initially, VAR model is applied to capture the interdependence between Nifty returns and VIX. Subsequently, the study employs the DCC GARCH model, a sophisticated statistical tool designed to capture time-varying correlations and volatilities to uncover the evolving nature of the relationship between Nifty returns in different time periods and India VIX. This study also helps in determining the potential range of NIFTY return for a given VIX level. The findings from the multivariate GARCH analysis reveal significant correlation and co-variance between Nifty returns and India VIX, shedding light on the presence and magnitude of spillover effects. These results contribute valuable insights for traders, especially option traders, investors, policymakers, and financial analysts, enhancing their understanding of the interconnectedness between implied volatility and nifty return. Furthermore, the research provides a foundation for developing more informed risk management strategies in the context of market fluctuations, ultimately contributing to the broader body of knowledge in financial econometrics.

Keywords: Spillover effect; Implied volatility; India VIX; Nifty return; Options; GARCH; G10 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s13198-025-02711-w

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