Generalized Correlation Measures of Causality and Forecasts of the VIX Using Non-Linear Models

18 Pages Posted: 21 Jun 2018

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Vincent J. Hooper

Xiamen University

Date Written: June 6, 2018

Abstract

The paper features an analysis of causal relations between the VIX, S&P500, and the realised volatility (RV) of the S&P500 sampled at 5 minute intervals, plus the application of an Artificial Neural Network (ANN) model to forecast the VIX. Causal relations are analysed using the recently developed concept of general correlation Zheng et al. (2012) and Vinod (2017). The neural network analysis is performed using the Group Method of Data Handling (GMDH) approach. The results suggest that causality runs from lagged daily RV and lagged continuously compounded return on the S&P500 index to the VIX. Out of sample tests suggest an ANN model can successfully predict the VIX using lagged RV and lagged S&P500 Index continuously compounded returns as inputs.

Keywords: GMC, VIX, RV5MIN, Causal Path, ANN

JEL Classification: C14, C32, C45, G13

Suggested Citation

Allen, David Edmund and Hooper, Vincent James, Generalized Correlation Measures of Causality and Forecasts of the VIX Using Non-Linear Models (June 6, 2018). Available at SSRN: https://ssrn.com/abstract=3191737 or http://dx.doi.org/10.2139/ssrn.3191737

David Edmund Allen (Contact Author)

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

Vincent James Hooper

Xiamen University ( email )

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