An Examination of Asymmetric Relation between Implied Volatility Index and Its Underlying Asset
Published: 2017
Author(s) Name: Karam Pal Narwal, Purva Chhabra |
Author(s) Affiliation: Prof., Finance, Haryana School of Busin., Guru Jambheshwar Univ. of Sci. and Tech., Haryana, India.
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Abstract
The volatility index is the measure of 30-day expected
volatility. Its association with stock index returns
provides an insight to the volatility traders to launch
derivatives products so that it can be used as a hedging
tool. The aim of the present study is to empirically
examine the relationship between the implied
volatility indices and its underlying asset in context
of developed and developing markets (like U.S.,
Japan, Germany, and China). The empirical findings
report the asymmetric behaviour which indicates
that a larger impact on implied volatility indices are
from negative return shocks as compared to positive
returns. This evinced that the investors and traders
respond highly to negative returns in low volatile
period by demanding more options at high premium
which makes the implied volatility high. Therefore,
the negative relationship between IVIX and stock
index returns makes the index relevant for investors
to diversifying their portfolio so that they can mitigate
the investment risk associated with the volatility.
Keywords: Indian Implied Volatility Index, Informational Content, Hedging, Derivatives, Asymmetric Relationship, Day of the Week Effect
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