On the Volatility of Volatility
15 Pages Posted: 24 Aug 2006
Date Written: August 24, 2006
The Chicago Board Options Exchange (CBOE) Volatility Index, VIX, is calculated based on prices of out-of-the-money put and call options on the S&P 500 index (SPX). Sometimes called the investor fear gauge, the VIX is a measure of the implied volatility of the SPX, and is observed to be correlated with the 30-day realized volatility of the SPX. Changes in the VIX are observed to be negatively correlated with changes in the SPX. However, no significant correlation between changes in the VIX and changes in the 30-day realized volatility of the SPX are observed. We investigate whether this indicates a mispricing of options following large VIX moves, and examine the relation to excess returns from variance swaps.
Keywords: Derivatives, options, volatility, volatility swaps
JEL Classification: G14, G12, C40
Suggested Citation: Suggested Citation