Under-Reaction of S&P 500 Implied Volatility to Relevant Information
Under-Reaction of S&P 500 Implied Volatility to Relevant Information

Summary/Abstract: The main goal of this study is to analyse the ability of the implied volatility index (VIX) to incorporate current stock market information that is relevant for the volatility forecasts. Employing historical market volatility, market trading volume and significant stock market returns as examples of market factors positively correlated with future market volatility, I document that VIX, though being positively correlated with these relevant market factors, does not manage to account for them fully and immediately, or in other words, under-reacts to relevant market information. I suggest that this finding may be explained by investors' tendency to be "anchored" towards (or over-affected by) the recent implied volatility measures, causing VIX to be relatively sticky and relatively less affected by the market factors, than the future realized volatility is.

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