Is Market Fear Persistent? A Long-Memory Analysis?
20 Pages Posted: 20 Jul 2017
Date Written: June 28, 2017
This paper investigates the degree of persistence of market fear. Specifically, two different long-memory approaches (R/S analysis with the Hurst exponent method and fractional integration) are used to analyse persistence of the VIX index over the sample period 2004-2016, as well as some sub-periods (pre-crisis, crisis and post-crisis). The findings indicate that its properties change over time: in normal periods it exhibits anti-persistence (there is a negative correlation between its past and future values), whilst during crisis period the level of persistence is increasing. These results can be informative about the nature of financial bubbles and anti-bubbles, and provide evidence on whether there exist market inefficiencies that could be exploited to make abnormal profits by designing appropriate trading strategies.
Keywords: market fear, VIX, persistence, long memory, R/S analysis, fractional integration
JEL Classification: C220, G120
Suggested Citation: Suggested Citation