What Makes the VIX Tick?

61 Pages Posted: 3 Nov 2012 Last revised: 26 Jul 2022

Multiple version iconThere are 2 versions of this paper

Date Written: February 27, 2014

Abstract

This working paper was written by Warren Bailey (Cornell University), Lin Zheng (City College of New York) and Yinggang Zhou (The Chinese University of Hong Kong).

We study minute-by-minute behavior of the VIX index and trading activity in the underlying S&P 500 options to understand the impact of macro and microeconomic forces on risk neutral volatility. VIX often increases with macroeconomic news, reflects the credibility of Fed monetary stimulus, and behaves differently before, during, and after the financial crisis. Comparing VIX to its estimated variance risk premium reveals divergences between uncertainty and risk aversion. The most prominent feature of the dynamics of VIX is mean reversion. This is consistent with liquidity provision which weakens during the financial crisis and is partly related to news arrival.

Keywords: VIX, implied volatility, volatility risk premium, macroeconomic news, policy uncertainty

JEL Classification: G11, G12, G13

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, What Makes the VIX Tick? (February 27, 2014). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 22/2012, Available at SSRN: https://ssrn.com/abstract=2169815

Hong Kong Institute for Monetary and Financial Research (Contact Author)

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