TY - CHAP
T1 - Does VIX truly measure return volatility?
AU - Chow, K. Victor
AU - Jiang, Wanjun
AU - Li, Jingrui
N1 - Publisher Copyright:
© 2021 by World Scientific Publishing Co. Pte. Ltd.
PY - 2020/1/1
Y1 - 2020/1/1
N2 - This chapter demonstrates theoretically that without imposing any structure on the underlying forcing process, the model-free CBOE volatility index (VIX) does not measure market expectation of volatility but that of a linear moment-combination. Particularly, VIX undervalues (overvalues) volatility when market return is expected to be negatively (positively) skewed. Alternatively, we develop a model-free generalized volatility index (GVIX). With no diffusion assumption, GVIX is formulated directly from the definition of log-return variance, and VIX is a special case of the GVIX. Empirically, VIX generally understates the true volatility, and the estimation errors considerably enlarge during volatile markets. The spread between GVIX and VIX follows a mean-reverting process.
AB - This chapter demonstrates theoretically that without imposing any structure on the underlying forcing process, the model-free CBOE volatility index (VIX) does not measure market expectation of volatility but that of a linear moment-combination. Particularly, VIX undervalues (overvalues) volatility when market return is expected to be negatively (positively) skewed. Alternatively, we develop a model-free generalized volatility index (GVIX). With no diffusion assumption, GVIX is formulated directly from the definition of log-return variance, and VIX is a special case of the GVIX. Empirically, VIX generally understates the true volatility, and the estimation errors considerably enlarge during volatile markets. The spread between GVIX and VIX follows a mean-reverting process.
KW - Ex ante moments
KW - Implied volatility
KW - VIX
UR - http://www.scopus.com/inward/record.url?scp=85096280326&partnerID=8YFLogxK
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U2 - 10.1142/9789811202391_0040
DO - 10.1142/9789811202391_0040
M3 - Chapter
AN - SCOPUS:85096280326
SN - 9789811202384
SP - 1533
EP - 1559
BT - Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning (In 4 Volumes)
ER -