Does the Implied Volatility Index Have Signaling Power? Evidence from Mexico

Abstract

This paper investigates whether the implied volatility index has signaling power for the future stock index returns from VIMEX (Mexican Implied Volatility Index) and MEXBOL (Mexican BOLSA IPC Index) and if there was a change in signaling power between, before, and after the international financial crisis. We find that the implied volatility index is a meaningful indicator and that its signaling power changes between pre and post crisis. In the post crisis period, the VIMEX still works as a meaningful indicator, but the predictive power is weakened compared to the previous period. Finally, we implemented a trading strategy using the VIMEX signal to test the quality of the signal. Our results show that the VIMEX driven strategy returns outperform the benchmark returns of the outright long MEXBOL position.