The implied volatility index: Is ‘investor fear gauge’ or ‘forward-looking’?

Abstract

The paper aims to examine implied volatility as the investor fear gauge or/and forward-looking expectation of future stock market volatility within emerging markets setting-India VIX. The earliest results evidenced that VIX is the gauge of investor fear, where in the expected stock market volatility rises when the given market is declined. It is also proven that expected volatility is being unbiased estimate of the actual return volatility (30-calendar days); hence, during the market turmoil VIX likely to be biased. Lastly, it is suggested that the nervousness of investor yields potential profit to the options seller (market crises). Thus, our research has practical implications for various reasons, such as, portfolio risk management, stock market volatility forecast, and options pricing.

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