Research ArticleOpen AccessGoogle Scholar indexed
Linkage between India Implied Volatility Index and Stock Index Returns
Xavier Institute of Management & Entrepreneurship, Bangalore, Karnataka, India
Department of Management Studies, Anna University, Chennai, Tamil Nadu, India
- 1 Xavier Institute of Management & Entrepreneurship, Bangalore, Karnataka, India
- 2 Department of Management Studies, Anna University, Chennai, Tamil Nadu, India
Theoretical Economics Letters·Volume 07 (2017)·Pages 929–938·Published 8 May 2017·DOI10.4236/tel.2017.74063
Copy link · social · email
Abstract
The present study examines the linkage between the change in implied volatility index and the underlying stock index return in the Indian stock market. The empirical results revealed that the contemporaneous return is the most important factor that determines the changes in the current India implied volatility. Besides, the empirical evidences confirm the negative asymmetry volatility-return relation, supporting the behavioral explanations (the affect and representativeness heuristics) rather than financial leverage hypothesis.
KeywordsIndia Implied Volatility IndexAsymmetric Volatility-Return RelationFear and Greed Index
- Black, F. (1976) Studies of Stock Price Volatility Changes. Proceedings of the 1976 Meetings of the American Statistical Association, 171-181.
- Christie, A.A. (1982) The Stochastic Behavior of Common Stock Variances: Value, Leverage and Interest Rate Effects. Journal of Financial Economics, 10, 407-432. https://doi.org/10.1016/0304-405X(82)90018-6
- Campbell, J.Y. and Hentschel, L. (1992) No News Is Good News: An Asymmetric Model of Changing Volatility in Stock Returns. Journal of Financial Economics, 31, 281-318. https://doi.org/10.1016/0304-405X(92)90037-X
- Shefrin, H.A. (2005) Behavioral Approach to Asset Pricing. Elsevier Academic Press, Burlington, MA.
- Dennis, P., Mayhew, S. and Stivers, C. (2006) Stock Returns, Implied Volatility Innovations, and the Asymmetric Volatility Phenomenon. Journal of Financial and Quantitative Analysis, 41, 381-406. https://doi.org/10.1017/S0022109000002118
- Hibbert, A.M., Daigler, R.T. and Dupoyet, B. (2008) A Behavioral Explanation for the Negative Asymmetric Return-Volatility Relation. Journal of Banking and Finance, 32, 2254-2266. https://doi.org/10.1016/j.jbankfin.2007.12.046
- Bekaert, G. and Wu, G. (2000) Asymmetric Volatility and Risk in Equity Markets. Review of Financial Studies, 13, 1-42. https://doi.org/10.1093/rfs/13.1.1
- Low, C. (2004) The Fear and Exuberance from Implied Volatility of S & P 100 Index Options. Journal of Business, 77, 527-546. https://doi.org/10.1086/386529
- Giot, P. (2005) Relationships between Implied Volatility Indexes and Stock Index Returns. Journal of Portfolio Management, 31, 92-100. https://doi.org/10.3905/jpm.2005.500363
- Bollerslev, T. and Zhou, H. (2006) Volatility Puzzles: A Simple Framework for Gauging Return-Volatility Regression. Journal of Econometrics, 131, 123-150. https://doi.org/10.1016/j.jeconom.2005.01.006
- Fernandes, M., Medeiros, M.C. and Scharth, M. (2014) Modeling and Predicting the CBOE Market Volatility Index. Journal of Banking and Finance, 40, 235-265. https://doi.org/10.1016/j.jbankfin.2013.11.004
- Badshah, I.U. (2013) Quantile Regression Analysis of the Asymmetric Return-Volatility Relation. Journal of Futures Markets, 33, 235-265. https://doi.org/10.1002/fut.21551
- Tang, C. (2007) Fear in the Korea Market. Review of Futures Markets, 16, 106-140.
- Frijns, B., Tallau, C. and Tourani-Rad, A. (2010) The Information Content of Implied Volatility: Evidence from Australia. Journal of Futures Markets, 30, 134-155.