Study of Association between Volatility Index and Nifty using VECM

Volatility in capital markets is the measure degree of variability of stock return from their expected return. The volatility in the capital market is the basis for price discovery in the financial asset. The volatility index (VIX) is the measurement index of the volatility of the capital market. It is the fear index of the capital market. The concept is first coined in 1993 in Chicago Board Options Exchange (CBOE). In India, such an index was introduced in 2008 by NSE. India VIX calculates the expected market volatility over the coming thirty days on Nifty Options. It Market index is the performance metric of the Indian capital market. This index is designed to reflect the overall market sentiments. An index is an important parameter to measure the performance of the economy as a whole. While the market index measures the direction of the market and is calculated by the price movements of the underlying stocks, the Volatility Index measures the volatility of the market and is calculated using the order book of the underlying index's options. In this study, we examine the association between India VIX and Nifty Index returns by using Johanson's co-integration, Vector Error Correction Model (VECM), and Granger causality Tools. The data for this study covers closing data of VIX value and Nifty closing value from January 2014 to December 2019 and has a total of 1474 daily observations. The result confirms that there are co-integrating relationships (long-run association) between VIX and Nifty. The Granger causality indicates Nifty does Granger Cause VIX but VIX does not granger Cause Nifty.

Effect of the Launch of Nifty Weekly Options on the Relationship between Nifty and India VIX

This paper examines the impact of the introduction of weekly expiry on Nifty options on the relationship between Nifty and India VIX. It demonstrates that the introduction of weekly expiration on Nifty options resulted in a significant decrease in the association of market returns and volatility. This decrease was visible across options-based volatility metrics like India VIX and non-options-based volatility metrics like Annualized Volatility of Futures and Underlying asset (Nifty Index). This study finds that shorter expiries and resultant larger volumes lower the correlation between market performance and various volatility indicators. This is done by testing the effect of Nifty volumes in the Options segment as a moderator variable in the relationship between Nifty and India VIX. In other words, an increase in India VIX now indicates a lower decline in Nifty than it did earlier. This paper also indicates that the inverse must also be true. Longer expiries and comparatively lower volumes contributed to a higher negative correlation between Nifty and India VIX. By comparing correlations in the periods before and after the introduction of weekly expiry on Nifty options, we measure the impact of volumes and expiration time