Relationship Between Chinese Volatility Index And Stock Market

CBOE launched VIX in 1993.Since then,the research on VIX has never stopped.Because of many reasons,Chinese stock option market develops slowly.Until 2016,China finally launched its first volatility index,IVX.Based on this background,this paper studies the relationship between stock market and volatility index and tries to explore the efficiency of the IVX index in capturing Chinese stock market.Based on the empirical regression results,this paper has proved that IVX is economically and statistically significant in improving the effectiveness of Chinese market volatility forecasts.According to the forecasting models derived from the in-sample regression analysis,the out-of-sample forecasting performance of IVX is also significant and superior to historical average forecast.Besides,the introduction of IVX could enhance the forecasting performance of other market variables.In contrast to the VXFXI,the forecasting performance of VXFXI in the model is almost entirely covered by IVX,which indicates the effectiveness of Chinese market itself.This paper further explores the asymmetric relationship between the IVX and SSE50 ETF returns and demonstrates that it is in accordance with "Anchoring Theory" and "Prospect Theory" in behavioral finance.The risk perception of investors in the current period is affected asymmetrically by stock returns in the current and previous periods.This property of IVX makes it a strong candidate for risk management tool whereby the volatility index can be used as a tool for portfolio insurance against worst declines.Combining the previous results,this paper finally tests whether IVX index can be used as a signal in hedging strategies.The empirical results reveal that effectiveness of the hedging strategy based on IVX is better than the conventional hedging strategy and strategy based on VXFXI.