Implied Volatility Indices – A Review

An implied volatility index reflects the market expectations for the future volatility of the underlying equity index. This study tests and documents the information content, regarding both the realized volatility and the returns of the underlying equity index, of all publicly available implied volatility indices across the world. The empirical findings suggest that implied volatility indices include information about future volatility beyond that contained in past volatility. In addition, we show that there is a statistically significant negative and asymmetric contemporaneous relationship between implied volatility changes and the corresponding underlying equity index returns. Furthermore, this study contributes to the international equity market integration studies by investigating the linkages among major stock exchanges; the basis of the integration analysis is the implied volatility of each market, as proxied by the corresponding implied volatility index and the findings suggest that there is significant integration with respect to market participants\u27 expectations about future uncertainty

The Information Content of VFTSE

The FTSE 100 Volatility Index (VFTSE) reflects the market expectations of the future monthly volatility of the UK benchmark equity index, FTSE100. VFTSE is calculated using the model-free methodology that involves option prices summations and is independent from the Black and Scholes pricing formula. This study tests and documents the information content of VFTSE regarding both the realized volatility and the returns of the underlying equity index. The empirical findings suggest that VFTSE includes information about future volatility beyond that contained in past volatility and in addition show that there is a statistically significant negative and asymmetric contemporaneous relationship between implied volatility changes and the underlying equity index returns

Implied volatility indices – A review

© 2020 Board of Trustees of the University of Illinois This study tests and documents the information content of all publicly available implied volatility indices regarding both the realized volatility and the returns of the underlying asset. These topics present a path traveled by earlier work, but there are gains in studying together all 47 volatility-based indices that are now available, in order to examine if different asset classes and financial instruments could possess different return-volatility relations and forecasting ability. Our findings suggest that implied volatility includes information about future volatility beyond that contained in past volatility; this finding is consistent across all assets under review. Furthermore, we find a significant contemporaneous relationship between implied volatility changes and underlying returns, but at the same time, we show that implied volatilities in commodities, bonds, currencies and volatility react differently to underlying price changes compared to equities. Hence, our findings have important implications for asset allocation, risk management and asset pricing

Direct and Indirect Effects of COVID-19 Pandemic on Implied Stock Market Volatility: Evidence from Panel Data Analysis

We investigate the effects of a google trend synthetic index concerning corona virus, as a composite indicator of searching term and theme, on the implied volatility of thirteen major stock markets, covering Europe, Asia, USA and Australia regions by using panel data analysis along with several model specifications and robustness tests. Increased search queries for COVID-19 not only have a direct effect on implied volatility, but also have an indirect effect via stock returns highlighting a risk-aversion channel operating over pandemic conditions. We show that these direct and indirect effects are stronger in Europe relative to the rest of the world. Moreover, in a PVAR framework, a positive shock on stock returns may calm down google searching about COVID-19 in Europe. Our findings suggest that google based anxiety about COVID-19 contagion effects leads to elevated risk-aversion in stock markets. Understanding the links between investors’ decision over a pandemic crisis and asset prices variability is critical for understanding the policy measures needed in markets and economies

Direct and Indirect Effects of COVID-19 Pandemic on Implied Stock Market Volatility: Evidence from Panel Data Analysis

We investigate the effects of a google trend synthetic index concerning corona virus, as a composite indicator of searching term and theme, on the implied volatility of thirteen major stock markets, covering Europe, Asia, USA and Australia regions by using panel data analysis along with several model specifications and robustness tests. Increased search queries for COVID-19 not only have a direct effect on implied volatility, but also have an indirect effect via stock returns highlighting a risk-aversion channel operating over pandemic conditions. We show that these direct and indirect effects are stronger in Europe relative to the rest of the world. Moreover, in a PVAR framework, a positive shock on stock returns may calm down google searching about COVID-19 in Europe. Our findings suggest that google based anxiety about COVID-19 contagion effects leads to elevated risk-aversion in stock markets. Understanding the links between investors’ decision over a pandemic crisis and asset prices variability is critical for understanding the policy measures needed in markets and economies

Assessing the Effectiveness of U.S. Financial Regulations: A Comparative Analysis with E.U. Responses

This paper assesses the effectiveness of US financial regulation in carrying out its intended purpose, namely, to adequately protect investors from industry abuse, insider advantages, and fraud. Reviewing recent financial crises, the role of the SEC, high profile Supreme Court cases, and legislation, such findings call into question the legitimacy of the financial system as a whole and is worrying due to Americans’ sheer reliance on banks and securities markets. Furthermore, this paper then compares the U.S. regulatory response with that of the E.U. as a result of the Global Financial Crisis and found that E.U. regulations are more clear, more potent, and more effective in handling and preventing financial crises. This paper uses statistical data, legislative analysis, and testimonial evidence to conclude that there are severe ways in which the US regulatory regime is lacking. Particularly, through vague laws that do not take proper measures to adequately protect against a future crisis, along with the evaluation of the capacity of the SEC to enforce the financial laws in question, US financial regulation does not effectively carry out its intended purpose

Exposure-based volatility: an application in corporate risk management

This study develops a non-traditional measure of risk, an exposure-based volatility, for the non-financial company and applies this measure to capture both the downside potential of cash-flows and the probability of requiring additional external financing under most foreseeable conditions. The empirical analysis is applied on a particular Bulgarian transport company and concludes that the proposed measure of exposure-based volatility manages to capture effectively the peaks and troughs in the variance of cash-flows, thus, significantly outperforming the historical standard deviation. This non-traditional downside risk estimate is by itself extremely useful as it contains significant information about a given company. Furthermore, it can be used as a valuable input in several risk management tools; in the current paper, a robust measure of CFaR and an original interpretation of Merton’s credit risk model are presente

Trading and investing in volatility products

Since the banking crisis the market for volatility exchange-traded products has developed rapidly as it opens to clients beyond the large institutional investor pool. Speculation is driven by increasingly complex leveraged and inverse exposures including those that attempt to trade on significant roll costs in volatility futures curves. Longer-term investors use these products for the purposes of equity diversification, driven by fears of an ongoing Eurozone crisis. We survey the burgeoning academic literature in this area and present a comprehensive and up-to-date comparison of the market and statistical characteristics of European and US exchange-traded volatility products