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What Makes the VIX Tick?

Author

Listed:
  • Warren Bailey

    (Cornell University)

  • Lin Zheng

    (City College of New York)

  • Yinggang Zhou

    (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research)

Abstract

We seek the roots of one-minute changes in VIX, an index of S&P 500 option prices, to understand risk neutral volatility and its risk premium component. Beyond leverage and risk premium effects, macroeconomic influences and some proxies for noise trading in the S&P 500 ETF market are significant, though measures of small investor sentiment have little significance. VIX changes display negative serial correlation suggesting liquidity provision in the options market. Temporary price effects are observed around macroeconomic news releases. Though often viewed as an exogenous state variable, a significant portion of VIX variability relates to trader behavior and macroeconomic fundamentals.

Suggested Citation

  • Warren Bailey & Lin Zheng & Yinggang Zhou, 2012. "What Makes the VIX Tick?," Working Papers 222012, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:222012
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    More about this item

    Keywords

    VIX; Implied Volatility; Volatility Risk Premium; Investor Sentiment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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