Decomposing the VIX Index into Greed and Fear

Serie Documentos de Trabajo - Nro. 780 (2021)

14 Pages Posted: 7 Apr 2021

See all articles by Juan A. Serur

Juan A. Serur

NYU - Courant Institute of Mathematical Sciences

José P Dapena

University of CEMA

Julián Ricardo Siri

University of CEMA

Date Written: March 2021

Abstract

Greed and fear are the main psychological factors driving investment deci-sions, and the VIX Index is regarded as the most important measure of howfearful the market feels about future returns of the main equity index, theS&P 500 Index. However, given that the VIX is calculated by combiningboth upside expected volatility implicit in out-of-the-money calls and down-side expected volatility implicit in the value of out-of-the-money puts, thetaken-for-granted assumption that a rising VIX should be interpreted as asign of growing fear in the equities market can be misleading. In this paperwe formally deconstruct the index into two components, the upside and thedownside expected volatility, in a similar fashion as it is done in statisticswith the semi-variance. We then propose a Greed-Fear index using the dataobtained to provide a better gauge about investors’ sentiment on the market.

Keywords: VIX, Volatility, Greed-Fear index, Variance Swap

Suggested Citation

Serur, Juan Andrés and Dapena, José Pablo and Siri, Julián Ricardo, Decomposing the VIX Index into Greed and Fear (March 2021). Serie Documentos de Trabajo - Nro. 780 (2021), Available at SSRN: https://ssrn.com/abstract=3806521 or http://dx.doi.org/10.2139/ssrn.3806521

Juan Andrés Serur

NYU - Courant Institute of Mathematical Sciences ( email )

Bobst Library, E-resource Acquisitions
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New York, NY 10003-711
United States

José Pablo Dapena (Contact Author)

University of CEMA ( email )

1054 Buenos Aires
Argentina

Julián Ricardo Siri

University of CEMA ( email )

1054 Buenos Aires
Argentina

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