Honors Program
University Honors
Date of Award
5-2021
Thesis Professor(s)
William Trainor
Thesis Professor Department
Economics and Finance
Thesis Reader(s)
Joseph Newhard
Abstract
This study examines the Chicago Board Option Exchange (CBOE) Volatility Index (VIX) which is the implied volatility calculated from short-term option prices on the Standards & Poor’s 500 stock index (S&P 500). Findings suggest VIX overestimates average volatility by approximately 3% but explains 55% of S&P 500’s proceeding month’s volatility. The implied volatility (IV) from options on the VIX add additional explanatory power for the S&P’s 500 proceeding kurtosis values (a measure of tail risk). The VIX option’s volatility smirks did not add additional explanatory power for explaining the S&P 500 volatility or kurtosis. A simple trading rule based on buying the S&P 500 whether the VIX, IV from the options on the VIX, and the VIX option’s volatility smirk decline over the preceding month results in an additional 0.96% return in the following month. However, this only occurs approximately 10% of the time and does not outperform a simple buy-and-hold strategy as the strategy has the investor out of the market the majority of the time.
Publisher
East Tennessee State University
Document Type
Honors Thesis - Withheld
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.
Recommended Citation
Stanley, Spencer and Trainor, William, "FORECASTS AND IMPLICATIONS USING VIX OPTIONS" (2021). Undergraduate Honors Theses. Paper 619. https://dc.etsu.edu/honors/619
Copyright
Copyright by the authors.