A simple expected volatility (SEV) index: Application to SET50 index options

Michael McAleer and Chatayan Wiphatthanananthakul

Mathematics and Computers in Simulation (MATCOM), 2010, vol. 80, issue 10, 2079-2090

Abstract: In 2003, the Chicago Board Options Exchange (CBOE) made two key enhancements to the volatility index (VIX) methodology based on S&P options. The new VIX methodology seems to be based on a complicated formula to calculate expected volatility. In this paper, with the use of Thailand's SET50 Index Options data, we modify the VIX formula to a very simple relationship, which has a higher negative correlation between the VIX for Thailand (TVIX) and SET50 index options. We show that TVIX provides more accurate forecasts of option prices than the simple expected volatility (SEV) index, but the SEV index outperforms TVIX in forecasting expected volatility. Therefore, the SEV index would seem to be a superior tool as a hedging diversification tool because of the high negative correlation with the volatility index.

Keywords: Volatility index; Model selection; Black–Scholes formula; Price forecasting; Time series (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: A Simple Expected Volatility (SEV) Index: Application to SET50 Index Options (2010)
Working Paper: Simple Expected Volatility (SEV) Index: Application to SET50 Index Options (2009)
Working Paper: A Simple Expected Volatility (SEV) Index: Application to SET50 Index Options (2009)
Working Paper: A Simple Expected Volatility (SEV) Index: Application to SET50 Index Options (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:80:y:2010:i:10:p:2079-2090

DOI: 10.1016/j.matcom.2010.04.001

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