Hypothesis Assumed: Implied Volatility Spillovers exist when there is a surprise effect in the news. The research work makes use of secondary research reports and primary data on the US indices.
Market indices that are analysed in this research work based on surprise news announcements are that of the three US indices VIX, VXO and VXN.
VIX (Fear Index)
VIX is considered as the fear index. The CBOE volatility index is considered as the main measure when it comes to understanding near-term volatility conditions (Onan et al., 2014; Gurgul and Wójtowicz, 2014). The value is indicated in the S & P 500 stock index option prices. VIX is calculated from the thirty-day variance of S & P 500 rate returns. The VIX value is 100 times the square root of this value and is calculated as an annualized variance. The VIX index is considered as a key indicator when it comes to understanding the sentiments of investors, the standing position with respect to stock prices, and market volatility (Belgacem et al., 2015). The CBOE creation of this market index is based on the need to make money in volatility and hence an understanding of this index is significant for this research. A host of volatility products are developed based on this index which furthermore adds to its significance. For instance, the US Presidential election in 2016 led to a surge in the fear index VIX. It climbed to around 40 percent which was a significant acceleration. The volatility pricing accelerated because the pricing options were developed based on the risk expected in further weeks. The research work considers the time period from January 1, 2008 to December 31, 2016 and will hence have to consider the impact of such news announcements included during the election time.
The CBOE calculates the volatility index based on the S & P 100 (OEX) options. The VXO is called the relative volatility index. The VXO standard deviation is used to calculate the volatility value. VXO stock volatility analysis is significant for understanding trading risks similar to the VIX. There are critical points in volatility where it would be necessary to consider technical adjustments (Chang et al., 2015; Scotti, 2016). Now while the CBOE S & P VXO is very similar to the VIX, it is necessary to study this index separately as the VIX value is drawn from a different benchmark. The narrower S & P 100 index (OEX) is made use of for the calculations of VXO and hence the value is considered separately in studying volatility indices (Savor and Wilson, 2013). The switch to make use of SPX allows for a broader sampling and hence a better understanding of expectations (Kenourgios, 2014). Traders usually keep a close watch on VIX and VXO. The surprise effect of the news announcements on VIX and how it differs from VXO can hence be studied as detailed differences.