The determinants of the model-free positive and negative volatilities

Abstract

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Asymmetric implied market volatility and terrorist attacks

“…Post global financial crisis, VIX − is always found to be higher than VIX + , emphasizing the puts hedging role and investors' concerns regarding the possibility of another similar event occurring. Such results are in line with previous studies decomposing implied volatility or variance measures (see Kilic and Shaliastovich, 2018;Bevilacqua et al, 2019).…”

“…The two VIX components are correlated at 0.92 among themselves. These results are in line with previous studies (see Kilic and Shaliastovich, 2018;Bevilacqua et al, 2019). Even though the correlation among the VIX measures is high in levels, we take log changes in VIX indexes aiming to show how separate options portfolios, namely, calls and puts, might contain different information compared to the VIX alone and compared to themselves with regards to terrorist attacks.…”

“…tube bombing, the Brussels airport bombing and the Nice driver attack, all produced significant ARs on the event day only for VIX − . While VIX and VIX − are highly positively correlated, a possible explanation for the difference in their volatilities response to terrorist attacks may be the fact that they are driven by different factors, with VIX − more connected to geopolitical issues than VIX (see Bevilacqua et al, 2019), explaining its higher level of reactiveness. This shows how the negative implied volatility index is more sensitive to terror driven events which are found to be reflected more in puts trading.…”

“…We then follow the methodology of Bevilacqua et al (2019) so as to compute both positive and negative components of VIX . More specifically, the following filters are applied on the K i term in equation ( 1): for VIX + only S&P 500 call options are considered when K i ≥ K 0 , and for VIX − only put options are considered when K i ≤ K 0 .…”

“…Furthermore, we examine the asymmetric effect that terrorist attacks may have on the S&P 500 options underlying the VIX index. Motivated by a vast literature which has begun to decompose volatility measures (see Barndorff-Nielsen et al, 2010;Segal et al, 2015;Fu et al, 2016;Kilic and Shaliastovich, 2018;Bevilacqua et al, 2019), we first decompose the implied volatility index into its positive and negative components, namely, VIX − computed by considering only S&P 500 puts, and VIX + computed considering only S&P 500 calls. Secondly, we contribute to this growing literature by showing the effect of terrorist attacks on the aggregate and decomposed VIX index by applying an event-study methodology to 17 significant terrorist attacks occurring across a number of developed countries over the past 18 years.…”