Journal of Banking and Finance V 40, P 1-10, 2014

Marcelo Fernandes, Marcelo Medeiros, Marcel Scharth Figueiredo Pinto.

This paper performs a thorough statistical examination of the time-series properties of the daily market

volatility index (VIX) from the Chicago Board Options Exchange (CBOE). The motivation lies not only on

the widespread consensus that the VIX is a barometer of the overall market sentiment as to what concerns

investors’ risk appetite, but also on the fact that there are many trading strategies that rely on

the VIX index for hedging and speculative purposes. Preliminary analysis suggests that the VIX index

displays long-range dependence. This is well in line with the strong empirical evidence in the literature

supporting long memory in both options-implied and realized variances. We thus resort to both parametric

and semiparametric heterogeneous autoregressive (HAR) processes for modeling and forecasting

purposes. Our main findings are as follows. First, we confirm the evidence in the literature that there

is a negative relationship between the VIX index and the S&P 500 index return as well as a positive contemporaneous

link with the volume of the S&P 500 index. Second, the term spread has a slightly negative

long-run impact in the VIX index, when possible multicollinearity and endogeneity are controlled for.

Finally, we cannot reject the linearity of the above relationships, neither in sample nor out of sample.

As for the latter, we actually show that it is pretty hard to beat the pure HAR process because of the very

persistent nature of the VIX index.