Fund Volatility Index Using Equity Market State Prices

17 Pages Posted: 6 Sep 2017

See all articles by Michael O'Neill

Michael O'Neill

Bond University - Bond Business School

Zhangxin Frank Liu

The University of Western Australia Business School

Date Written: September 2017

Abstract

The Fund Volatility Index (FVX) is proposed as a forward measure of volatility with applications in fund hedging and risk management. The method applies equity market state prices to individual fund pay‐offs. FVX is validated as a predictor of short‐term realised volatility for 30 exchange traded funds. Performance of the method is compared with existing methods using a data set of 14 925 non‐traded funds. FVX has lower bias and higher forecast accuracy than existing methods. As a more general measure, it allows for incorporation of terms to capture individual fund skewness and projection of higher moments of returns.

Keywords: State price volatility, Mutual fund

Suggested Citation

O'Neill, Michael and Liu, Zhangxin (Frank), Fund Volatility Index Using Equity Market State Prices (September 2017). Accounting & Finance, Vol. 57, Issue 3, pp. 837-853, 2017, Available at SSRN: https://ssrn.com/abstract=3032157 or http://dx.doi.org/10.1111/acfi.12177

Michael O'Neill (Contact Author)

Bond University - Bond Business School ( email )

Gold Coast
Australia

Zhangxin (Frank) Liu

The University of Western Australia Business School ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

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