Discerning lead-lag between fear index and realized volatility
Fatin Farhana Wahab and
MPRA Paper from University Library of Munich, Germany
In theory, historical volatility gauges the fluctuations of underlying assets or securities by monitoring changes in price over predetermined time period, while implied volatility looks into the future in its attempts to forecast the movement of the asset’s price based on current ones. Option trader tends to combine both volatilities with realized volatility serving as the baseline and implied volatility redefining the relative values of the options. Henceforth, the purpose of this study is twofold; first is to investigate the nature of lead-lag between the ‘fear index’ (VIX) and its corresponding realized volatility (RVI) of S&P 500 indices. Second, we examine the dynamic analysis of implied volatility transmission across inter-market correlation with newly adapted volatility indices from CBOE, VIX, OVX and GVZ to indicate which market is leading. Contrary to the popular perception, the paper finds that S&P 500 implied volatility is lagging its historical variance markedly, and surprisingly even its price index is leading the implied volatility as well. The study also concludes that Gold spearheads the market with stocks being the most sensitive to shocks. Our findings have clear policy implications for trading strategies and using volatilities in risk management.
Keywords: implied volatility; realized volatility; inter-market correlation; VIX; OVX; GVZ (search for similar items in EconPapers)
JEL-codes: C58 E44 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm, nep-mac and nep-rmg
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