Breaking VIX at Open: Evidence of Uncertainty Creation and Resolution

50 Pages Posted: 21 Jun 2019 Last revised: 13 Jan 2021

See all articles by Jingjing Chen

Jingjing Chen

Northeastern University - D’Amore-McKim School of Business

George J. Jiang

Washington State University

Chaowen Yuan

Shanghai University of Finance and Economics - School of Economics

Dongming Zhu

Shanghai University of Finance and Economics - School of Economics

Date Written: January 8, 2021

Abstract

We decompose daily (close-to-close) changes of VIX into overnight (close-to-open) and trading-hour (open-to-close) changes. Consistent with the notion that non-trading creates uncertainty and trading resolves uncertainty, we find that there is generally an increase in VIX overnight and decrease in VIX during trading hours. More importantly, we document an important seasonality in VIX, i.e., the non-trading day effect. Overnight increase of VIX involving weekends or holidays is significantly higher than that over two consecutive trading days. We also document that VIX exhibits different patterns around pre-scheduled macroeconomic news announcements, unexpected economic events, and government policy actions. In particular, we observe an increase of VIX prior to pre-scheduled macroeconomic news announcements such as the FOMC announcements, followed by a sharp drop-off post the announcements. Finally, we show that breaking daily VIX changes into overnight and trading-hour components and incorporating the non-trading day effect and the effects of informational events in the modeling of VIX dynamics lead to not only significant improvements in in-sample fitting but also superior performance of out-of-sample-forecasting and active trading strategies on VIX.

Keywords: VIX index; Uncertainty creation; Uncertainty resolution; Macroeconomic news announcements; Out-of-sample forecasts; Trading strategy

JEL Classification: G14; G17

Suggested Citation

Chen, Jingjing and Jiang, George and yuan, chaowen and Zhu, Dongming, Breaking VIX at Open: Evidence of Uncertainty Creation and Resolution (January 8, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3404779

Jingjing Chen

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

George Jiang (Contact Author)

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

Chaowen Yuan

Shanghai University of Finance and Economics - School of Economics ( email )

777 Guoding Road
Shanghai, 200433
China

Dongming Zhu

Shanghai University of Finance and Economics - School of Economics ( email )

777 Guoding Road
Shanghai, 200433
China

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