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A Simple Expected Volatility (SEV) Index: Application to SET50 Index Options

Michael McAleer and Chatayan Wiphatthanananthakul

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

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: Financial markets; model selection; new products; price forecasting; time series; volatility forecasting (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-sea
Date: 2010-03-01
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http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1015.pdf (application/pdf)

Related works:
Journal Article: A simple expected volatility (SEV) index: Application to SET50 index options (2010) Downloads
Working Paper: Simple Expected Volatility (SEV) Index: Application to SET50 Index Options (2009) Downloads
Working Paper: A Simple Expected Volatility (SEV) Index: Application to SET50 Index Options (2009) Downloads
Working Paper: A Simple Expected Volatility (SEV) Index: Application to SET50 Index Options (2009) Downloads
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