Behind the Rejection of Alternative Measures of Implied Equity Volatility A Note.docVIP

Journal of Financial Risk Management 2013. Vol.2, No.1, 10-12 Published Online March 2013 in SciRes (/journal/jfrm) DOI:10.4236/jfrm.2013.21002 Behind the Rejection of Alternative Measures of Implied Equity Volatility: A Note G. D. Hancock Department of Finance, University of Missouri, St. Louis, USA Email: gdweise@ Received November 20 , 2012; revised December 24 , 2012; accepted January 3 , 2013 th th rd This note evaluates the risk-adjusted performance of the implied volatility of the NASDAQ index (VXN), Russell 2000 (RVX) and Dow Jones Industrial Averages (VXD). The results are compared to the per- formance of the implied volatility of the S P 500 (VIX) in order to identify the unique contribution of each volatility index. Futures and option contracts have been offered on the VXD, VXN and RVX with results so dismal that the contracts were eventually delisted. In May 2012 futures were once again offered on the VXN but there is little market interest as indicated by the low trading volume. This note finds that the equity index implied volatility measures on VXN, RVX and VXD do not offer sufficient benefits be- yond what investors can achieve with VIX which may explain, in part, the rejection of derivatives written on those measures of tradable implied index volatility. Keywords: VIX; Implied Volatility; VXN; VXD; RVX Introduction Jones. The Russell 2000, on the other hand, is relatively unique compared to the other indexes. This is because the index fo- cuses on smaller cap stocks whereas the others focus on larger cap stocks. This note explores the reasons behind the lack of investor in- terest by first presenting the data and methodology, followed by an analysis of the results and conclusions. In the past ten years, the number of volatility products has proliferated a