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A simple expected volatility (SEV) index: Application to SET50 index options

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  • McAleer, Michael
  • Wiphatthanananthakul, Chatayan

Abstract

In 2003, the Chicago Board Options Exchange (CBOE) made two key enhancements to the volatility index (VIX) methodology based on S&P options. The new VIX methodology seems to be based on a complicated formula to calculate expected volatility. In this paper, with the use of Thailand's SET50 Index Options data, we modify the VIX formula to a very simple relationship, which has a higher negative correlation between the VIX for Thailand (TVIX) and SET50 index options. We show that TVIX provides more accurate forecasts of option prices than the simple expected volatility (SEV) index, but the SEV index outperforms TVIX in forecasting expected volatility. Therefore, the SEV index would seem to be a superior tool as a hedging diversification tool because of the high negative correlation with the volatility index.

Suggested Citation

  • McAleer, Michael & Wiphatthanananthakul, Chatayan, 2010. "A simple expected volatility (SEV) index: Application to SET50 index options," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 80(10), pages 2079-2090.
    • Handle: RePEc:eee:matcom:v:80:y:2010:i:10:p:2079-2090
    DOI: 10.1016/j.matcom.2010.04.001
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    Cited by:

    1. Casarin, Roberto & Chang, Chia-Lin & Jimenez-Martin, Juan-Angel & McAleer, Michael & Pérez-Amaral, Teodosio, 2013. "Risk management of risk under the Basel Accord: A Bayesian approach to forecasting Value-at-Risk of VIX futures," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 94(C), pages 183-204.
    2. Chia-Lin Chang & Juan-Ángel Jiménez-Martín & Michael McAleer & Teodosio Pérez-Amaral, 2011. "Risk Management of Risk under the Basel Accord: Forecasting Value-at-Risk of VIX Futures," Working Papers in Economics 11/12, University of Canterbury, Department of Economics and Finance.
    3. Chang, Chia-Lin & Jimenez-Martin, Juan-Angel & McAleer, Michael & Amaral, Teodosio Perez, 2013. "The rise and fall of S&P500 variance futures," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 151-167.
    4. David E. Allen & Michael McAleer & Robert Powell & Abhay K. Singh, 2013. "A Non-Parametric and Entropy Based Analysis of the Relationship between the VIX and S&P 500," JRFM, MDPI, vol. 6(1), pages 1-25, October.
    5. Chang, Chia-Lin & González-Serrano, Lydia & Jimenez-Martin, Juan-Angel, 2013. "Currency hedging strategies using dynamic multivariate GARCH," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 94(C), pages 164-182.

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