An Empirical Model of India's Nifty VIX Index

Indian Journal of Finance, Vol. 9, No. 8, pp. 7-18

NYU Poly Research Paper

18 Pages Posted: 31 Jul 2015 Last revised: 14 Jun 2016

See all articles by Ronald T. Slivka

Ronald T. Slivka

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering

Shuang Gao

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering

Jie Ren

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering

Date Written: April 28, 2015

Abstract

Because implied volatility is essential for pricing options, analyzing derivative strategies and measuring risk in investment portfolios containing derivatives, understanding variations in implied volatility also becomes vital. Aside from a secular trend, volatility clustering and calendar effects are two commonly occurring sources of such variation. To analyze volatility clusters in India’s implied volatility index (Nifty VIX) daily closing levels for the Nifty VIX were gathered covering trading days from January 2010 through January 2014. ARIMA and GARCH models applied to the de-trended Nifty VIX time series were found of limited use for describing this data with its episodic clustering and periodic events. However an alternative modeling approach using Fourier analysis and Butterworth filters successfully split the time series into two logical parts, one with both clusters and periodic behavior and one with near-white noise. The likely origins of major clusters in India’s Nifty implied volatility index appeared linked to important global financial events external to India during the study period thereby supporting evidence of temporal spillover into the India market. The half-lives of implied volatility clusters were measured and compared with those in the US market. The full range of Nifty VIX behavior for the study period was seen to consist of four distinct elements: trend, periodic events, clusters of volatility and noise. When combined these elements provide an empirical model able to produce successful forecasts for 60-day-ahead periods.

Keywords: India, Nifty, Nifty VIX, Implied Volatility, Volatility Clustering, Fourier Analysis

JEL Classification: G12, G 13, G14, G15, G17

Suggested Citation

Slivka, Ronald T. and Gao, Shuang and Ren, Jie, An Empirical Model of India's Nifty VIX Index (April 28, 2015). Indian Journal of Finance, Vol. 9, No. 8, pp. 7-18, NYU Poly Research Paper, Available at SSRN: https://ssrn.com/abstract=2637344

Ronald T. Slivka (Contact Author)

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States
2153213524 (Phone)

Shuang Gao

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

Jie Ren

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

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