A new star is born: does the VIX1D render common volatility forecasting models for the U.S. equity market obsolete?

Publikation: Vorabdruck/Dokumentation/BerichtVorabdruck (Preprint)

Abstract

Due to the high relevance of 1-day volatility forecasts and the increasing demand for zero-day-to-expiration (0DTE) options on the S&P 500, the Cboe recently introduced the 1-Day Volatility Index (VIX1D). Compared to the longer-term volatility indices of the VIX family, it is overall lower and more volatile, shows a weaker negative correlation with the S&P 500, and has a distinctive intraday pattern with an upward trend. We show that the new index overestimates the volatility of the S&P 500 significantly and propose an easy-to-implement proxy to adjust for the inherent volatility risk premium (VRP). By comparing the adjusted VIX1D with the original and various extended Heterogeneous Autoregressive (HAR(X)) models, we show that the adjusted VIX1D forecasts the volatility more accurately while requiring considerably less historical data. Thus, our results indicate that the VIX1D has the potential to fundamentally change the way researchers and practitioners generate volatility forecasts for the U.S. stock market.

Details

OriginalspracheEnglisch
Herausgeber (Verlag)Elsevier Science B.V.
Seitenumfang33
PublikationsstatusVeröffentlicht - 17 Juli 2023
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Schlagworte

Schlagwörter

  • VIX1D, implied volatility, volatility forecasting, HAR modeling, 0DTE options

Bibliotheksschlagworte