A study on VIX index and volatility trading and its applicability to Indian markets

Abstract

Derivatives based on the VIX index, which was first developed by Chicago Board of Options Exchange (CBOE) is widely used as a means to hedge volatility in the US markets. This paper makes an attempt to test the correlation between the VIX Index calculated on NIFTY 50 and the actual NIFTY returns. Results of these studies will give an idea about the effectiveness of using the VIX index for hedging against volatility of the Indian markets. The accuracy of the NIFTY VIX index is further compared against the Realized Volatity Index (RealVol) of the Sensex to check for the accuracy of VIX as an indicator of actual volatility.