The Relevance of Cboe Volatility Index to Stock Markets in Emerging Economies

Abstract

We examine the capability of CBOE S&P500 Volatility index (VIX) to determine returns of emerging stock market indices as compared to local stock markets volatility indicators. Our study considers CBOE S&P500 VIX, local BRIC stock market volatility indices and BRIC stock market MSCI indices daily returns in the period from January 1, 2009 to September 30, 2014. Research is conducted in two steps. First, we perform Spearman correlation analysis between daily changes in CBOE S&P500 VIX, local BRIC stock market VIX and MSCI BRIC stock market indices returns. Second, we perform multiple regression analysis with ARCH effects to estimate the relevance of CBOE S&P500 VIX and local VIX in determining BRIC stock market returns. Research reports weak correlation between CBOE S&P500 VIX and local VIX (except for Brazil). Furthermore, results challenge the assumption of CBOE S&P500 VIX being an indicator of global risk aversion. We conclude that commonly documented trends of rising globalization and stock markets co-integration are not yet present in emerging economies, therefore the usage of CBOE S&P500 VIX alone in determining BRIC stock market returns should be considered cautiously, and local volatility indices should be accounted for in analysis. Furthermore, the data confirms the presence of safe haven properties in Chinese stock market index.