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RBI Working Paper No. 13/2022: Is Implied Volatility Index (VIX) a Forward-Looking Indicator of Stock Market Movements in India?

September 19, 2022

Today the Reserve Bank of India placed on its website a Working Paper titled “Is Implied Volatility Index (VIX) A Forward-Looking Indicator of Stock Market Movements in India?” under the Reserve Bank of India Working Paper Series*. The paper is co-authored by Amarendra Acharya, Subrat Kumar Seet and Prakash A. Salvi.

The paper examines the relationship between the implied volatility index (VIX) and stock market movements in India over the last decade. It finds that negative returns in the stock index generate larger changes in implied volatility as compared to positive returns. The size of the return also influences the relative change in the implied volatility index. Further, it is seen that higher levels of volatility influence buying decisions of the investors at a duration of 20- and 60- days. Such behaviour indicates that the Indian stock market is forward-looking to an extent and resembles the pattern observed in the US.

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