International Journal of Financial Management

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An Examination of Asymmetric Relation Between Implied Volatility Index and its Underlying Asset


Affiliations
1 Finance at Haryana School of Business, Guru Jambheshwar University of Science and Technology, Hisar, Haryana, India
2 Haryana School of Business, Guru Jambheshwar University of Science and Technology, Hisar, Haryana, India
     

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The volatility index is the measure of 30-day expected volatility. Its association with stock index returns provides an insight to the volatility traders to launch derivatives products so that it can be used as a hedging tool. The aim of the present study is to empirically examine the relationship between the implied volatility indices and its underlying asset in context of developed and developing markets (like U.S., Japan, Germany, and China). The empirical findings report the asymmetric behaviour which indicates that a larger impact on implied volatility indices are from negative return shocks as compared to positive returns. This evinced that the investors and traders respond highly to negative returns in low volatile period by demanding more options at high premium which makes the implied volatility high. Therefore, the negative relationship between IVIX and stock index returns makes the index relevant for investors to diversifying their portfolio so that they can mitigate the investment risk associated with the volatility.

Keywords

Indian Implied Volatility Index, Informational Content, Hedging, Derivatives, Asymmetric Relationship, Day of the Week Effect.
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  • An Examination of Asymmetric Relation Between Implied Volatility Index and its Underlying Asset

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Authors

Karam Pal Narwal
Finance at Haryana School of Business, Guru Jambheshwar University of Science and Technology, Hisar, Haryana, India
Purva Chhabra
Haryana School of Business, Guru Jambheshwar University of Science and Technology, Hisar, Haryana, India

Abstract


The volatility index is the measure of 30-day expected volatility. Its association with stock index returns provides an insight to the volatility traders to launch derivatives products so that it can be used as a hedging tool. The aim of the present study is to empirically examine the relationship between the implied volatility indices and its underlying asset in context of developed and developing markets (like U.S., Japan, Germany, and China). The empirical findings report the asymmetric behaviour which indicates that a larger impact on implied volatility indices are from negative return shocks as compared to positive returns. This evinced that the investors and traders respond highly to negative returns in low volatile period by demanding more options at high premium which makes the implied volatility high. Therefore, the negative relationship between IVIX and stock index returns makes the index relevant for investors to diversifying their portfolio so that they can mitigate the investment risk associated with the volatility.

Keywords


Indian Implied Volatility Index, Informational Content, Hedging, Derivatives, Asymmetric Relationship, Day of the Week Effect.

References