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 Thailand

No 2009-16, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

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.

Keywords: Financial markets; model selection; new products; price forecasting; time series; volatility forecasting. (search for similar items in EconPapers)
Pages: 39 pages
Date: 2009
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https://eprints.ucm.es/id/eprint/8698/1/0916.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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