The Implied Volatility of Australian Index Options

37 Pages Posted: 8 Aug 2008

See all articles by Sean Dowling

Sean Dowling

Reserve Bank of Australia

Jayaram Muthuswamy

Kent State University

Date Written: October 15, 2005

Abstract

We construct a new measure of Australian stock market volatility based on the implied volatility of S&P/ASX Index options. Dubbed the Australian Market Volatility Index (AVIX), it is constructed in a manner similar to the popular CBOE Market Volatility Index (VIX) in the United States. We examine the statistical properties of AVIX and the temporal relationship between AVIX changes and S&P/ASX 200 Index returns, and also investigate the presence of any seasonalities in AVIX before assessing AVIX as a predictor of future volatility. Consistent with VIX, we find that AVIX exhibits large negative first-order autocorrelation, and is also negatively correlated with lagged and contemporaneous S&P/ASX 200 Index returns. However, AVIX exhibits no asymmetry in its response to positive and negative return shocks. As a predictor of future volatility, AVIX performs poorly compared to historical volatility. Interestingly, when nonsynchronous trading is controlled for, we find that AVIX exhibits a much stronger relationship with future volatility.

Suggested Citation

Dowling, Sean and Muthuswamy, Jayaram, The Implied Volatility of Australian Index Options (October 15, 2005 ). Available at SSRN: https://ssrn.com/abstract=500165 or http://dx.doi.org/10.2139/ssrn.500165

Sean Dowling

Reserve Bank of Australia ( email )

GPO Box 3947
Sydney, 2000
Australia

Jayaram Muthuswamy (Contact Author)

Kent State University ( email )

Kent, OH 44242
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
526
Abstract Views
3,142
rank
78,808
PlumX Metrics