Abnormal Stock Market Returns around VIX Volatility Peaks : Is there evidence for abnormal return around volatility peaks?
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Is has been observed that the volatility index, VIX, often ends in a spike peak. The intention when introducing VIX was to measure the volatility related to S&P indices. Evidence in the literature argue that VIX is an estimate of investors sentiment and fear, by need for insurance of portfolio in term of options. In the thesis we outlined three studies related to VIX and S&P 500. We perform a replica study of the already observed asymmetrical relation between VIX and S&P 500, where we include symmetrical models to discuss the results. Furthermore, two studies take the spike peak in VIX into account. The first determine the peaks of VIX in terms of rising and falling phases and contains statistical summary of the phases. The second study determine the abnormal return in S&P 500 around the peaks in VIX, with use of a window including ten days before peak and ten days after peak. The studies are motivated by the relationship between the VIX and S&P 500. There are limited literature about VIX in terms of phases of rising and falling volatility. The motivation for these studies is to find a clear structure of the relationship around the spike peak. To understand investors sentiment, theory from the literature about behavioral finance are included. The research goals for the studies are to find clear patterns of how return act in relation to volatility. We expect evidence of negative relationship between VIX and S&P 500, where S&P 500 increases more slowly then it drops. In terms of the abnormal returns we expect the return to be significantly negative before the peak and significantly positive in the days after the peak. The results from the replica study give evidence of a negative relationship, although we did not reach all the expected results as in Whaley (2000) and Whaley (2009). Results for the study of peaks shows that duration of a falling phase is longer than duration of a rising phase, and the opposite for amplitude in VIX. Results for the abnormal study show a clear negative trend of abnormal return before the peak, cumulative abnormal return of – 4.106 percent for the eleven first days of the event study. In addition, the abnormal return for the ten days after the peak gave 3.12 percent.
Master thesis Business Administration - University of Agder 2016