The imprecision of volatility indexes

Rohini Grover, Ajay Shah

Concerns about imprecision arise when a VIX estimator is computed by aggregating several imprecise implied volatility estimates (IVs). We propose a bootstrap strategy to measure the imprecision of a model based VIX estimator. This yields a standard deviation, and a confidence interval, of the conventional VIX estimate. We find that the imprecision of VIX is economically significant, and is material for real-world applications of volatility indexes. We propose a model selection strategy, where alternative statistical estimators of VIX are evaluated based on this imprecision.

Citation: The imprecision of volatility indexes, Rohini Grover, Ajay Shah, IGIDR Working Paper WP-2014-031, August 2014.


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