The VIX and VXN Volatility Measures: Fear Gauges or Forecasts?

Derivatives Use, Trading and Regulation 12(1), 12-27, 2006

14 Pages Posted: 20 Jan 2014 Last revised: 21 Mar 2015

See all articles by Marcelle Arak

Marcelle Arak

University of Colorado at Denver - J.P. Morgan Center for Commodities; University of Colorado at Denver - Department of Finance

Naranchimeg Mijid

Connecticut Center for Innovative Entrepreneurs

Date Written: May 1, 2006

Abstract

This paper examines the behaviour of the ‘VXO’, previously called the ‘VIX’, and ‘VXN’ measures of the volatility implied by stock index options. From the mid-1990s to the end of 2002, the volatility measures seem to reflect both sentiment associated with market declines (‘fear’) and imminent actual volatility. There is a stark difference between the early and late parts of that time interval, however. Prior to the Russian default in August 1998, the volatility measures do not forecast imminent stock index volatility; the VXO in this early period seems to be reflective of investor fear. In the interval after the Russian default, however, both the VXO and the VXN reflect future volatility rather than investor fear.

Suggested Citation

Arak, Marcelle and Mijid, Naranchimeg, The VIX and VXN Volatility Measures: Fear Gauges or Forecasts? (May 1, 2006). Derivatives Use, Trading and Regulation 12(1), 12-27, 2006, Available at SSRN: https://ssrn.com/abstract=2344384

Marcelle Arak (Contact Author)

University of Colorado at Denver - J.P. Morgan Center for Commodities ( email )

The Business School
1475 Lawrence St.
Denver, CO 80202
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University of Colorado at Denver - Department of Finance ( email )

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Denver, CO 80204
United States
303-595-4007 (Phone)
303-628-1299 (Fax)

Naranchimeg Mijid

Connecticut Center for Innovative Entrepreneurs ( email )

185 Main St. Suite 403
New Britain, CT 06051
United States
860-328-2954 (Phone)

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