Decomposing the VIX Index into Greed and Fear

Juan Andrés Serur, Jose Dapena () and Julián R. Siri

No 780, CEMA Working Papers: Serie Documentos de Trabajo. from Universidad del CEMA

Abstract: Greed and fear are the main psychological factors driving investment deci-sions, and the VIX Index is regarded as the most important measure of howfearful the market feels about future returns of the main equity index, theS&P 500 Index. However, given that the VIX is calculated by combiningboth upside expected volatility implicit in out-of-the-money calls and down-side expected volatility implicit in the value of out-of-the-money puts, thetaken-for-granted assumption that a rising VIX should be interpreted as asign of growing fear in the equities market can be misleading. In this paperwe formally deconstruct the index into two components, the upside and thedownside expected volatility, in a similar fashion as it is done in statisticswith the semi-variance. We then propose a Greed-Fear index using the dataobtained to provide a better gauge about investors’ sentiment on the market.

Keywords: VIX; Volatility; Greed-Fear index; Variance Swap (search for similar items in EconPapers)
Pages: 14 pages
Date: 2021-03
New Economics Papers: this item is included in nep-cwa and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:cem:doctra:780

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