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

Chatayan Wiphatthanananthakul and Michael McAleer
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Chatayan Wiphatthanananthakul: Faculty of Economics,Chiang Mai University and Chulachomklao Royal Military Academy

No CIRJE-F-672, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

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 apparently complicated VIX formula to a 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.

Pages: 40pages
Date: 2009-09
New Economics Papers: this item is included in nep-fmk and nep-sea
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http://www.cirje.e.u-tokyo.ac.jp/research/dp/2009/2009cf672.pdf (application/pdf)

Related works:
Journal Article: A simple expected volatility (SEV) index: Application to SET50 index options (2010)
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)
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