The VIX is Very Volatile!

by Graham Giller September 03, 2009 00:07

In comments on this blog's post on the VIX-GARCH spread, the idea of applying a GARCH model to the VIX Index itself was raised by Soham Das. A quantity we will refer to as VOLVIX for short. I have, in fact, performed this analysis in the past and, in response to the comments, decided to publicize the VOLVIX data as a blog page. The model is not as nicely consistent as those for the standard equity indices. I found that there is evidence for a heteroskedasticity in the daily returns of the VIX itself. However, the innovations show definite evidence for skewness in those returns, which are not accurately parameterized by the distributions input into the GARCH solver.

A GARCH(1,1) Model for the Volatility of the VIX

Not withstanding such nitpicking, one conclusion is very clear: the VIX is very volatile. A daily volatility of 5% is equivalent to annualized levels in the region of 75%. Per articulus, the annualized volatility of the VIX reached extreme levels (over 200%)!

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About the Author

Graham Giller - Headshot GRAHAM GILLER
Dr. Giller holds a doctorate from Oxford University in experimental elementary particle physics. His field of research was statistical astronomy using high energy cosmic rays. After leaving Oxford, he worked in the Process Driven Trading Group at Morgan Stanley, as a strategy researcher and portfolio manager. He then ran a CTA/CPO firm which concentrated on trading eurodollar futures using statistical models. From 2004, he has managed a private family investment office. In 2009, he joined a California based hedge fund startup, concentrating on high frequency alpha and volatility forecasting. A detailed resume is available.

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