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Volatility Based Sentiment Indicators for Timing the Markets

Cacia, Fabio Antonio and Tzvetkov, Rossen (2008)
Department of Economics
Abstract
VIX, published by the Chicago Board Options Exchange, is a well known
implied volatility estimator. In this paper we assess its capability to be used as a
sentiment indicator, and to give signals for a short term investment strategy. It will be
proved and discussed how VIX-based strategies – also known as “Contrarian” strategies
– can be effective as they lead to higher returns than the market. We also propose a purer
sentiment indicator derived from VIX that gives more accurate market timing signals. We
call this indicator “Net Emotional Volatility Index” (NEVI). It proves to have interesting
properties, a highly significant statistical relationship with the market return, and a
considerable power to time the market. The results of our... (More)
VIX, published by the Chicago Board Options Exchange, is a well known
implied volatility estimator. In this paper we assess its capability to be used as a
sentiment indicator, and to give signals for a short term investment strategy. It will be
proved and discussed how VIX-based strategies – also known as “Contrarian” strategies
– can be effective as they lead to higher returns than the market. We also propose a purer
sentiment indicator derived from VIX that gives more accurate market timing signals. We
call this indicator “Net Emotional Volatility Index” (NEVI). It proves to have interesting
properties, a highly significant statistical relationship with the market return, and a
considerable power to time the market. The results of our back-testing for the period
2001-2002 and 2006-2007 using the two indicators are presented, compared and
discussed. Possible explanations of the information that NEVI brings and why its signals
work are provided. (Less)
Please use this url to cite or link to this publication:
author
Cacia, Fabio Antonio and Tzvetkov, Rossen
supervisor
organization
year
type
H1 - Master's Degree (One Year)
subject
keywords
GARCH, volatility, sentiment, VIX, market timing signals, Economics, econometrics, economic theory, economic systems, economic policy, Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik
language
English
id
1335113
date added to LUP
2008-06-07 00:00:00
date last changed
2010-08-03 10:51:46
@misc{1335113,
  abstract     = {{VIX, published by the Chicago Board Options Exchange, is a well known
implied volatility estimator. In this paper we assess its capability to be used as a
sentiment indicator, and to give signals for a short term investment strategy. It will be
proved and discussed how VIX-based strategies – also known as “Contrarian” strategies
– can be effective as they lead to higher returns than the market. We also propose a purer
sentiment indicator derived from VIX that gives more accurate market timing signals. We
call this indicator “Net Emotional Volatility Index” (NEVI). It proves to have interesting
properties, a highly significant statistical relationship with the market return, and a
considerable power to time the market. The results of our back-testing for the period
2001-2002 and 2006-2007 using the two indicators are presented, compared and
discussed. Possible explanations of the information that NEVI brings and why its signals
work are provided.}},
  author       = {{Cacia, Fabio Antonio and Tzvetkov, Rossen}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Volatility Based Sentiment Indicators for Timing the Markets}},
  year         = {{2008}},
}