More Than You Ever Wanted to Know About the VIX
Author: Stefan Rostek
Publisher:
Published: 2014
Total Pages: 30
ISBN-13:
DOWNLOAD EBOOKIn this paper, I show that the volatility index VIX is not model-free as soon as the diff usion term is not Brownian motion even when correcting for jumps. In a stock index model that allows for temporary periods of under- or overreaction, such as a multifractional model, a wrong annualization procedure associated with the VIX, may lead to severe mispricings as the three concepts of the VIX, the volatility per annum and (the square-root of) realized variance do not coincide any longer.As a byproduct, this article proves that multifractionality is a parsimonious and economically sound explanation for the observable phenomenon of volatility clustering as it suggests that clusters of abnormally high (low) volatility can be attributed to periods of underreaction (overreaction). In this way, the paper brings together two observable patterns in fi nancial markets: the transitory existence of periods with serially correlated asset returns and the phenomenon of volatility clustering.