Volume 29 Number 1, 2024

Construction of Directional Volatility Index

Chun-Liang Lin ^a*, Szu-Lang Liao ^b
a* Department of Money and Banking, National Chengchi University, Taipei City 116011, Taiwan
benzcalvert@hotmail.com
^b Department of Money and Banking, National Chengchi University, Taipei City 116011, Taiwan
liaosl@nccu.edu.tw

ABSTRACT

Is it possible to change the common idea that volatility is not directional? This paper provides a new volatility index - Conditional VIX has directionality. The change of Conditional VIX has a very high directional relationship with the changes of futures price at the same time, and can transform multiple market sentiments into market consensus. This paper further explores the famous double-slit experiment in the field of quantum mechanics, which shows that whether measuring photons or not has a significant difference in the change of bright and dark bands. Does this phenomenon also exist in the macro world? This paper studies whether the Futures Exchange measuring the loss of trader or not, which will have an impact on the trading behavior. The VIX index is an important sentiment index in the financial market, but the past literature mostly discussed the extreme reactions of fear and greed. This paper is the first to discuss the differences of eight kinds of sentiment changes according to the theory of the eight trigrams (I Ching), and draw candlestick charts with eight colors, so that futures price changes can be reflected the combination of sentiment and options volatility at the same time. Finally, we study the relationship between whether the Futures Exchange measures the loss of trader or not and future price changes (movement patterns). The results show that when the market volatility is high, traders are more willing to express their inner thoughts when the trader's loss is not measured (that is, no maintenance margin call is required), so the predictive power of futures price changes (movement patterns) is more obvious. 

JEL Classification: G4, G13, G17, C83

Keywords: VIX, market consensus, sentiment index, eight trigrams (I Ching)

Cite this article: 

Lin, C.-L., Lao, S.-L., 2024, Construction of Directional Volatility Index, International Journal of Business, 29(1), 006. https://doi.org/10.55802/IJB.029(1).006