TITLE:
Does the Implied Volatility Index Have Signaling Power? Evidence from Mexico
AUTHORS:
Jin Yong Yang, Junyoung Heo, In-Sung Yeo, Sang-Heon Lee
KEYWORDS:
Implied Volatility, VIMEX, Expected Returns
JOURNAL NAME:
Modern Economy,
Vol.5 No.8,
July
18,
2014
ABSTRACT: This paper
investigates whether the implied volatility index has signaling power for the
future stock index returns from VIMEX (Mexican Implied Volatility Index) and
MEXBOL (Mexican BOLSA IPC Index) and if there was a change in signaling power
between, before, and after the international financial crisis. We find that the
implied volatility index is a meaningful indicator and that its signaling power
changes between pre and post crisis. In the post crisis period, the VIMEX still
works as a meaningful indicator, but the predictive power is weakened compared
to the previous period. Finally, we implemented a trading strategy using the
VIMEX signal to test the quality of the signal. Our results show that the VIMEX
driven strategy returns outperform the benchmark returns of the outright long MEXBOL
position.