The Implied Volatility of Australian Index Options
37 Pages Posted: 8 Aug 2008
Date Written: October 15, 2005
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.
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