On the Volatility of Volatility

15 Pages Posted: 24 Aug 2006

See all articles by Stephen D. H. Hsu

Stephen D. H. Hsu

University of Oregon - Department of Physics

Brian Murray

University of Oregon

Date Written: August 24, 2006

Abstract

The Chicago Board Options Exchange (CBOE) Volatility Index, VIX, is calculated based on prices of out-of-the-money put and call options on the S&P 500 index (SPX). Sometimes called the investor fear gauge, the VIX is a measure of the implied volatility of the SPX, and is observed to be correlated with the 30-day realized volatility of the SPX. Changes in the VIX are observed to be negatively correlated with changes in the SPX. However, no significant correlation between changes in the VIX and changes in the 30-day realized volatility of the SPX are observed. We investigate whether this indicates a mispricing of options following large VIX moves, and examine the relation to excess returns from variance swaps.

Keywords: Derivatives, options, volatility, volatility swaps

JEL Classification: G14, G12, C40

Suggested Citation

Hsu, Stephen D. H. and Murray, Brian, On the Volatility of Volatility (August 24, 2006). Available at SSRN: https://ssrn.com/abstract=926379 or http://dx.doi.org/10.2139/ssrn.926379

Stephen D. H. Hsu

University of Oregon - Department of Physics ( email )

OR
United States

Brian Murray (Contact Author)

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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