Dynamic Correlation and Predictive Ability of VIX

• Main Authors: Cheng An-Ting, 鄭安婷
• Other Authors: Ray Yeutien Chou
• Format: Others
• Language: en_US
• Published: 2008
• Online Access: http://ndltd.ncl.edu.tw/handle/81086820781175120106

碩士 === 國立交通大學 === 管理科學系所 === 96 === This study provides dynamic time-varying viewpoint by using the Dynamic Conditional Correlation (DCC) model of Engle (2002) to estimate the time-varying correlation between volatility index and stock index and we also investigate the relationship during four distinct sub-periods which pertain to different trading environments. The empirical analysis shows that there is a strong negative relationship between the returns of VIX and S&P 500 index and the negative correlation is stronger in high-volatility trading environments than in low-volatility markets. In addition, we demonstrate that there exists an asymmetric relationship between returns of VIX and S&P 500 index, and the VIX returns’ response to negative S&P 500 index returns is sharper in low-volatility periods. Subsequently, we examine whether VIX can identify buying or selling opportunities in stock market. A “sell signal” just occurred when the VIX level is extremely low. On the other hand, high or very high VIX levels indeed over-sold markets and hence can be viewed as short-term to middle-term “buy signals”.