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VIX Forecasting

23 Pages Posted: 21 Apr 2004  

Utkarsh Majmudar

Synstrat Consulting LLP

Arnab Banerjee

iGATE Global Solutions, Ltd.

Abstract

The celebrated Black-Scholes model for valuing options uses a number of inputs - current stock price, risk-free interest rate, exercise price, time to maturity and volatility of returns. One critical input is the volatility of returns. Historical volatility is of little use as what is relevant is future volatility. Assuming efficient markets, a good source of volatility estimate is the implied volatility. Among the inputs to the Black-Scholes model all except volatility are known in advance. The output - the current call price is also known. Implied volatility is arrived at using the current call prices and all other inputs in the Black-Scholes formula to ascertain the volatility. This is a forward looking volatility estimate. We forecast volatility using VIX data obtained from CBOE. This paper adds value to extant literature by forecasting the revised VIX using a variety of forecasting tools like GARCH, EGARCH, APARCH, GJR and IGARCH. The EGARCH model is selected as it performs well on forecast accuracy. Using combinations of options, it is possible to trade volatility as if it were any other commodity, so that accurate predictions of future volatility give the forecaster the potential to make a more direct profit.

Keywords: Volatility, Forecasting, GARCH

JEL Classification: C53, G14, G13

Suggested Citation

Majmudar, Utkarsh and Banerjee, Arnab, VIX Forecasting. Available at SSRN: https://ssrn.com/abstract=533583 or http://dx.doi.org/10.2139/ssrn.533583

Utkarsh Majmudar (Contact Author)

Synstrat Consulting LLP ( email )

304 Alacrity Pride
Tank Bund Road, NS Palya
Bangalore, 560076
India
+91-80-30013651 (Phone)

Arnab Banerjee

iGATE Global Solutions, Ltd. ( email )

Bangalore - 560 066
India

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