A Study on India Volatility Index (VIX) and its Performance as Risk Management Tool in Indian Stock Market

Abstract

This study is aimed at examining the relationship between India VIX and NIFTY and to examine the usefulness of volatility index as risk management tool for stock market trading. It is found that relationship between NIFTY and VIX is strong when market is moving down and vice a versa. I observed that two indices moved in opposite direction. The linear association between the India VIX and NIFTY is statistically significant. The result indicated that statistically significant relationship exist between percentage change in the level of India VIX and rates of returns for various holding periods on index future contract on CNX Nifty Index and CNX midcap 50 Index. In terms of trading strategies it is found that portfolio performance can be improved by shifting the portfolio from midcap to large cap stocks when India VIX goes up and shifting the portfolio from large-cap to mid-cap when India VIX goes down.

Keywords: Stock Market Volatility, Volatility Index, Timing Strategies

JEL Classification: G19