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The daily rise and fall of the VIX1D: Causes and solutions of its overnight bias

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  • Albers, Stefan
  • Kestner, Lars N.

Abstract

This paper explores the unique intraday dynamics of the VIX1D. We identify a distinct overnight bias, that causes the index to consistently rise during trading hours and to fall overnight. This bias stems from the index’s calculation methodology, particularly the use of business time and dynamic weighting of next-term options, which include overnight variance risk premiums. It overlaps with and is more pronounced than the day-of-the-week effect. To mitigate this bias, we propose data filtering and revising the calculation method to a forward-starting variance. These solutions aim to enhance the VIX1D’s interpretability and reliability for risk assessment in financial markets.

Suggested Citation

  • Albers, Stefan & Kestner, Lars N., 2024. "The daily rise and fall of the VIX1D: Causes and solutions of its overnight bias," Finance Research Letters, Elsevier, vol. 62(PA).
    • Handle: RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324002162
    DOI: 10.1016/j.frl.2024.105186
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    References listed on IDEAS

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    1. Lou, Dong & Polk, Christopher & Skouras, Spyros, 2019. "A tug of war: Overnight versus intraday expected returns," Journal of Financial Economics, Elsevier, vol. 134(1), pages 192-213.
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    5. Peter Carr & Liuren Wu, 2009. "Variance Risk Premiums," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1311-1341, March.
    6. Fulvio Corsi, 2009. "A Simple Approximate Long-Memory Model of Realized Volatility," Journal of Financial Econometrics, Oxford University Press, vol. 7(2), pages 174-196, Spring.
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    More about this item

    Keywords

    VIX1D; Implied volatility; Intraday pattern; Overnight bias; Day-of-the-week effect;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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