Predicting stock market volatility: A new measure

• Published in: The journal of futures markets Vol. 15; no. 3; pp. 265 - 302
• Main Authors: Fleming, Jeff, Ostdiek, Barbara, Whaley, Robert E.
• Format: Journal Article
• Language: English
• Published: New York Wiley Subscription Services, Inc., A Wiley Company 01.05.1995; Published by J. Wiley in affiliation with the Center for the Study of Futures Markets, Columbia University; Wiley Periodicals Inc
• Subjects: Economic models; Futures; Indexes; Options markets; Securities markets; Statistical analysis; Stock exchange; Stock exchanges; Stock prices; Studies; Volatility; United States > US
• ISSN: 0270-7314; 1096-9934
• DOI: 10.1002/fut.3990150303

The CBOE Market Volatility Index (VIX) is an average of S&P 100 option (OEX) implied volatilities. As such, it represents a market-consensus estimate of future stock market volatility. The usefulness of the volatility index as a measure of expected volatility depends on its behavior. A study investigates the statistical properties of VIX and evaluates its predictive power. The assessment proceeds along 3 levels: 1. The time series history of VIX is examined to provide a description of its univariate properties and seasonalities. 2. The study considers the consistency of the VIX with the empirical literature regarding conditional volatility. 3. The analysis evaluates the performance of VIX as a forecast of stock market volatility. The evidence indicates that VIX is well behaved with little evidence of seasonality. Daily changes in VIX display a slight first-order autocorrelation. For weekly changes, significant mean reversions detected. VIX also has a strong negative and asymmetric association with contemporaneous stock market returns. The index exhibits a strong relationship to future realized stock market volatility.