Abstract

https://ssrn.com/abstract=2489345
 


 



Does VIX Truly Measure Return Volatility?


Victor Chow


West Virginia University

Wanjun Jiang


Guang Hua School of Management, Peking University

Jingrui Li


West Virginia University

August 30, 2014


Abstract:     
This article demonstrates theoretically that without imposing any structure on the underlying forcing process, the model-free CBOE volatility index (VIX) does not measure market expectation of volatility but that of a linear moment-combination. Particularly, VIX undervalues (overvalues) volatility when market return is expected to be negatively (positively) skewed. Alternatively, we develop a model-free generalized volatility index (GVIX). With no diffusion assumption, GVIX is formulated directly from the definition of log-return variance, and VIX is a special case of the GVIX. Empirically, VIX generally understates the true volatility, and the estimation errors considerably enlarge during volatile markets. The spread between GVIX and VIX follows a mean-reverting process.

Number of Pages in PDF File: 32

Keywords: Implied Volatility, VIX, Ex-ante Moments

JEL Classification: G10


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Date posted: August 31, 2014 ; Last revised: November 17, 2014

Suggested Citation

Chow, Victor and Jiang, Wanjun and Li, Jingrui, Does VIX Truly Measure Return Volatility? (August 30, 2014). Available at SSRN: https://ssrn.com/abstract=2489345 or http://dx.doi.org/10.2139/ssrn.2489345

Contact Information

Victor Chow (Contact Author)
West Virginia University ( email )
P. O. Box 6025
Morgantown, WV 26506
United States
Wanjun Jiang
Guang Hua School of Management, Peking University ( email )
Beijing
China
Jingrui Li
West Virginia University ( email )
PO Box 6025
Morgantown, WV 26506
United States
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