Cross‐sectional analysis of emerging market volatility index (India VIX) with portfolio returns

Abstract

Purpose

Earlier studies establish a positive relationship between volatility index (VIX) and the stock index returns. These studies are mainly restricted to developed markets and research in this regard in emerging markets is scarce. The purpose of this paper is to fill this gap.

Design/methodology/approach

The paper studies the direct and cross‐sectional relationship of India VIX in relation to three important parameters: viz., stock beta, market to book value of equity and market capitalization. The paper constructs value weighted portfolio sorted on the basis viz., stock beta, market to book value of equity and market capitalization. The paper employs three‐factor multiple regression to find out the results.

Findings

The paper finds that India VIX has a positive and significant relationship with the returns of the value‐weighted high‐low portfolios sorted on the basis of the above parameters. The paper examines the behavior of India VIX in the presence of the above two parameters. The India VIX yields a positive and significant relationship with the above sorted portfolio returns.

Research limitations/implications

India VIX was recently introduced in November, 2007 and therefore the research is expected to suffer from small sample bias.

Practical implications

The findings suggest India VIX is a distinct risk factor capable of predicting the price discovery mechanism of the market.

Originality/value

In the rapidly expanding emerging markets the introduction of Volatility Index is a recent phenomenon. Research in this regard is scarce, particularly in the area of finding predictive ability of the Volatility Index. This research is in this direction and would definitely help the market regulators and policy‐makers with their understanding of the market and market direction. It would help them to correct the market imbalances and avert crisis, which has been recently witnessed.

Citation

Bagchi, D. (2012), "Cross‐sectional analysis of emerging market volatility index (India VIX) with portfolio returns", International Journal of Emerging Markets, Vol. 7 No. 4, pp. 383-396. https://doi.org/10.1108/17468801211264306