This study examines the Chicago Board Option Exchange (CBOE) Volatility Index (VIX) which is the implied volatility calculated from short-term option prices on the Standards & Poor’s 500 stock index (S&P 500). Findings suggest VIX overestimates average volatility by approximately 3% but explains 55% of S&P 500’s proceeding month’s volatility. The implied volatility (IV) from options on the VIX add additional explanatory power for the S&P’s 500 proceeding kurtosis values (a measure of tail risk). The VIX option’s volatility smirks did not add additional explanatory power for explaining the S&P 500 volatility or kurtosis. A simple trading rule based on buying the S&P 500 whether the VIX, IV from the options on the VIX, and the VIX option’s volatility smirk decline over the preceding month results in an additional 0.96% return in the following month. However, this only occurs approximately 10% of the time and does not outperform a simple buy-and-hold strategy as the strategy has the investor out of the market the majority of the time.
| Identifer | oai:union.ndltd.org:ETSU/oai:dc.etsu.edu:honors-1810 |
| Date | 01 May 2021 |
| Creators | Stanley, Spencer, Trainor, William |
| Publisher | Digital Commons @ East Tennessee State University |
| Source Sets | East Tennessee State University |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | Undergraduate Honors Theses |
| Rights | Copyright by the authors., http://creativecommons.org/licenses/by-nc-nd/3.0/ |
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