RBI Working Paper Examines VIX as a Forward-Looking Indicator of Stock Market Movements in India

The Reserve Bank of India (RBI) has released Working Paper No. 13/2022 titled “Is Implied Volatility Index (VIX) a Forward-Looking Indicator of Stock Market Movements in India?” as part of the RBI Working Paper Series. The paper is co-authored by Amarendra Acharya, Subrat Kumar Seet, and Prakash A. Salvi.

The study analyses the relationship between the implied volatility index (VIX) and stock market movements in India over the past decade. It finds that negative returns in the stock index lead to larger changes in implied volatility compared to positive returns, and the magnitude of returns further influences the relative change in VIX.

Additionally, the research indicates that higher levels of volatility affect investor buying decisions over 20- and 60-day durations, suggesting that the Indian stock market exhibits forward-looking behavior. These patterns are observed to resemble the trends seen in the US stock market, highlighting the predictive value of VIX in anticipating market movements.