Predictive Ability of IVIX & Its Relation with Stock Market Returns

Abstract:- India volatility index, IVIX captures behavioral and psychological aspects of traders. The purpose of introducing IVIX is to avail new instrument for trading and hedge through it. It is believed that investors perception about the Nifty 50 in near term can be indicated using IVIX. Here an attempt is made to understand the relation between IVIX and market return using t –Test for r. The study also aims to understand the predictive ability of IVIX using t – test for slope, which can be helpful to the investors to take the decision. The study provided sufficient evidence that stock market returns are negatively associated with the Volatility Index. The negative correlation prevailing between IVIX and NIFTY 50, would give an opportunity to investors to use IVIX as a directional tool to know the future movement in NIFTY 50. The t – Test for slope finds that there is significant relationship between IVIX and NIFTY50 which implies that predictive ability of IVIX is high.

INTRODUCTION

Volatility Index (VIX) was discussed for the first time in paper by Prof. Robert E Whaley of Duke University, US in 1993. In the same year Chicago Board Options Exchange (CBOE) became the first exchange in the world to introduce a volatility index and named it VIX. In 1994, German Futures and Options Exchange (GFOE) introduced an implied volatility index with name (VDAX). Volatility index was introduced in India on March 2008, which is named as (IVIX) India volatility index that captures behavioral and psychological aspects of traders. The purpose of introducing IVIX is to avail new instrument for trading and hedge through it. VIX has been considered by many to be the world’s premier barometer of investor sentiment. Volatility Index (VIX) is a symbolic indicator to manage the risk in financial markets. It provides an understanding of the volatility in the options markets. Volatility Index is a measure of market expectation of volatility over the near term. A higher volatility means that a security’s value can potentially vary over a large range of values. This means that the price of security can change dramatically. A lower volatility means that a security’s value does not fluctuate dramatically, but change in value at a steady pace over a period of time.
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