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.
Forecasting the Variability of Stock Index Returns with Stochastic Volatility Models and Implied Volatility
