The Daily Rise and Fall of the VIX1D: Causes and Solutions of Its Overnight Bias

16 Pages Posted: 8 Dec 2023 Last revised: 22 Jan 2024

See all articles by Stefan Albers

Stefan Albers

Faculty of Business and Economics, Dresden University of Technology

Lars N. Kestner

Teilinger Capital

Date Written: January 20, 2024

Abstract

This paper explores the unique intraday dynamics of the VIX1D. We identify a distinct overnight bias, that causes the index to consistently rise during trading hours and to fall overnight. This bias stems from the index's calculation methodology, particularly the use of business time and dynamic weighting of next-term options, which include overnight variance risk premiums. It overlaps with and is more pronounced than the day-of-the-week effect. To mitigate this bias, we propose data filtering and revising the calculation method to a forward-starting variance. These solutions aim to enhance the VIX1D's interpretability and reliability for risk assessment in financial markets.

Keywords: VIX1D, implied volatility, intraday pattern, overnight bias, day-of-the-week effect

JEL Classification: C58, G14, G17

Suggested Citation

Albers, Stefan and Kestner, Lars N., The Daily Rise and Fall of the VIX1D: Causes and Solutions of Its Overnight Bias (January 20, 2024). Available at SSRN: https://ssrn.com/abstract=4650419 or http://dx.doi.org/10.2139/ssrn.4650419

Stefan Albers (Contact Author)

Faculty of Business and Economics, Dresden University of Technology ( email )

Münchner Platz 3
Dresden, 01187
Germany

Lars N. Kestner

Teilinger Capital ( email )

1100 Louisiana St, Ste 5500
Houston, TX 77002
United States

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