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What Makes the VIX Tick?

Warren Bailey, Lin Zheng and Yinggang Zhou
Additional contact information
Warren Bailey: Cornell University
Lin Zheng: City College of New York
Yinggang Zhou: The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research

No 222012, Working Papers from Hong Kong Institute for Monetary Research

Abstract: We seek the roots of one-minute changes in VIX, an index of S&P 500 option prices, to understand risk neutral volatility and its risk premium component. Beyond leverage and risk premium effects, macroeconomic influences and some proxies for noise trading in the S&P 500 ETF market are significant, though measures of small investor sentiment have little significance. VIX changes display negative serial correlation suggesting liquidity provision in the options market. Temporary price effects are observed around macroeconomic news releases. Though often viewed as an exogenous state variable, a significant portion of VIX variability relates to trader behavior and macroeconomic fundamentals.

Keywords: VIX; Implied Volatility; Volatility Risk Premium; Investor Sentiment (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2012-09
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