Can the Chinese volatility index reflect investor sentiment?

Wen Long, Manyi Zhao and Yeran Tang

International Review of Financial Analysis, 2021, vol. 73, issue C

Abstract: The volatility index is the implied volatility calculated inversely from the option prices. This study investigates whether the official Chinese volatility index, iVX, can represent investor sentiment. In order to describe investor sentiment comprehensively, we build a three-dimensional investor sentiment measurement system composed of macro, meso and micro level, and decompose iVX into three components to obtain short-term, medium-term fluctuations and long-term trend by EEMD method. The relationships between iVX, its components and sentiment indexes at each level have been analyzed separately, and the empirical results reveal all components of iVX can reflect the investor sentiment at the corresponding level but to which extent they can reflect are not the same. Further we introduce the mixed-frequency dynamic factor analysis to extract the common sentiment factor, which shows stronger correlation with contemporaneous iVX, compared with the sentiment indexes at each level. The ADL model in robustness check also demonstrates the results. Our findings confirm iVX can represent the common sentiment and expectations of Chinese investors in different time scales.

Keywords: iVX; Investor sentiment; EEMD; Mixed-frequency dynamic factor analysis; Correlation (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521920302556
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:73:y:2021:i:c:s1057521920302556

DOI: 10.1016/j.irfa.2020.101612

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().