Beyond the Traditional VIX: A Novel Approach to Identifying Uncertainty Shocks in Financial Markets
We introduce a new identification strategy for uncertainty shocks to explain macroeconomic volatility in financial markets. The Chicago Board Options Exchange Volatility Index (VIX) measures the market expectations of future volatility, but traditional methods based on second-moment shocks and the time-varying volatility of the VIX often do not effectively to capture the non-Gaussian, heavy-tailed nature of asset returns. To address this, we constructed a revised VIX by fitting a double-subordinated Normal Inverse Gaussian Lévy process to S&P 500 log returns, to provide a more comprehensive measure of volatility that captures the extreme movements and heavy tails observed in financial data. Using an axiomatic framework, we developed a family of risk–reward ratios that, when computed with our revised VIX and fitted to a long-memory time series model, provide a more precise identification of uncertainty shocks in financial markets.
Authors
- Svetlozar T. Rachev (ORCID: https://orcid.org/0000-0002-0869-4399)
- Frank J. Fabozzi (ORCID: https://orcid.org/0000-0002-2827-1465)
- Abootaleb Shirvani (ORCID: https://orcid.org/0000-0003-3683-2194)
- Ayush Jha
Institutions
- Texas Tech University (US)
- Johns Hopkins University (US)
- Kean University (US)
Publication Details
- Journal
- Journal of risk and financial management
- Published
- 2024-12-29
- DOI
- https://doi.org/10.3390/jrfm18010011
- Citations
- 1
- Primary Topic
- Market Dynamics and Volatility
- Type
- article
- Field-Weighted Citation Impact
- 1.13