The Information Content in a Volatility Index for Spain

Abstract:     
A model-free methodology is for the first time used in this paper to estimate a daily volatility index (VIBEX-NEW) for the Spanish financial market. We show that daily changes in VIBEX-NEW display a negative, tight contemporaneous relationship with IBEX daily returns, contrary to other common volatility indicators based on implied volatility or historical volatility, which make it a suitable volatility index for the Spanish stock market. Finally, even though the VIBEX-NEW volatility index has not been constructed with a forecasting goal in mind, it can produce forecasts of IBEX-35 realized volatility at least as good as those emerging from historical and conditional volatility measures from a GARCH(1,1). A feasible volatility correction methodology is proposed to achieve it.

Number of Pages in PDF File: 45

Keywords: volatility index, forecasting, returns

JEL Classification: C53, G13, G15

working papers series