Investors Perception on Indian Volatility Index and IVIX Futures Contract

Authors:

Ranjana Kothari
Assistant Professor, Amity University, India
email: rkothari@ggn.amity.edu

Surya Bahadur G. C.
Assistant Professor, School of Business, Pokhara University, Nepal
email: suryagc@pu.edu.np

Abstract

This study attempts to examine the opinion of investors' on India Volatility Index (IVIX) and
IVIX futures contracts. A questionnaire survey has been undertaken to collect opinion of
investors on stock market volatility in India, the usefulness of IVIX as predictor of future
short-term volatility and attractiveness of IVIX futures contract for trading volatility and
hedging volatility risk. The sample investors include institutional investors, brokers, sub-
brokers and individual investors. The final sample size for the study consists of 197
respondents comprising of 40 individual investors, 98 institutional investors, 20 brokers and
39 sub-brokers. The results show that the IVIX is a good indicator of future short-term stock
market volatility and is perceived to be a better indicator for future stock market volatility as
compared to traditional measures of volatility. It has higher predictability for upward
movement in stock indices as compared to downward movement; hence, IVIX is more a
bullish indicator. Despite the usefulness of IVIX, its familiarity with investors, especially
individual investors is low. The IVIX futures contract which is a derivative product based on
IVIX is attractive to investors for volatility trading and portfolio risk management. However,
very few investors are found to invest in IVIX futures. The lot size of the IVIX futures and its
complexity are major hindrances for individual investors. The institutional investors are
major investors in IVIX futures and it is used primarily for speculative motive relative to
hedging volatility risk.

Keywords: India VIX, India VIX Futures, Stock Market Volatility, Volatility Index
1. Introduction

The study of financial assets volatility is important to academics, policy makers, and financial
market participants for several reasons. First, prediction of financial market volatility is
important to economic agents because it represents a measure of risk exposure in their
investments. Second, a volatile stock market is a serious concern for policy makers because
instability of the stock market creates uncertainty and thus adversely affects growth
prospects. Recent evidence shows that when markets are perceived as highly volatile, it may
act as a potential barrier to investing (Poshakwale and Murinde, 2001). Third, the stock
market volatility causes reduction in consumer spending (Garner, 1990). Finally, pricing of
derivative securities and pricing of call option is a function of volatility. Stock return
volatility hinders economic performance through consumer spending. It may also affect
business investment spending. Further the extreme volatility could disrupt the smooth
functioning of the financial system and lead to structural or regulatory changes and in
extreme cases result in market crash and economic crisis. Thus it can be seen that the study of
stock market volatility is very important and can be helpful for the formulation of economic
policies and framing rules and regulations related to stock market volatility.

The stock market in India has had its fair share of crisis caused by excessive speculation
resulting in excessive volatility. Undoubtedly, the confidence of investors to some extent has
been eroded by excessive volatility of the Indian Stock Markets. Harvey (1995) provides
evidence that volatility in emerging equity markets is higher than in developed equity
markets. The wide spread concern of the exchange management, brokers and investors alike
has realized the importance of being able to measure and predict stock market volatility.
From an investors view point, it would be immensely useful if the future stock return
volatility could be predicted from the past data. Volatility index (VIX) is popular tools used
for forecasting stock market volatility.

Forecasting of stock market volatility is useful for investors as it is an indicator of risk

inherent in stock market investment. Volatility index is a popular tool for predicting the
future short-term market volatility (Sarwar, 2012). The first volatility index (VIX) was
introduced by Chicago Board of Options Exchange (CBOE). After that, the index has also
been introduced in several developed and emerging markets. VIX is calculated on the basis of
implied volatility derived from option prices. These volatility indices are measure of market
expectation of volatility over a short-term future period (Giot, 2004; Becker et al., 2009;
Bagcchi, 2012). Often referred to as the investor fear gauge, the VIX aims to track the
market expectation of volatility, giving an indication about how nervous the market is about
the future. It reflects investors consensus view of future expected stock market volatility
(Ryu, 2012). When the VIX level is low, it implies that investors are optimistic and
complacent rather than fearful in the market, which indicates that investors perceive no or
low potential risk. On the contrary, a high VIX reading suggests that investors perceive
significant risk and expect the market to move sharply in either direction. VIX generally
moves inversely to stock markets, rising when stocks fall and vice-versa. Globally known as
a fear index, VIX is actually one of the best contrarian technical indicators in the world
(Rhoads, 2011).

The question how well the implied volatility forecast as indicated by VIX predicts the future
realized volatility has been received a great deal of attention in the financial literature.
Whaley (2000) was among the first to point out that there is a negative statistically significant
relationship between the returns of stock and associated implied volatility indexes and
moreover, positive stock index returns correspond to declining implied volatility levels, while
negative returns correspond to increasing implied volatility levels. For the S&P 100 index,
the relationship is asymmetric, negative stock index returns are triggered by greater
proportional changes in implied volatility measures than are positive returns. Prior studies
reveal that the general conclusion is that implied volatility outperforms the known historical
volatility measures (Blair et.al., 2001; Corrado & Miller, 2005). On the contrary, Becker et.al.
(2006) find that VIX is not an efficient forecaster of future realized volatility and other
historical volatility estimates can be superior to VIX alone.

Many studies in developed countries study relationship between VIX and the stock market
volatility. However, such research in context of emerging nations where VIX has been
introduced relatively lately is scanty. Sarwar (2012) examines the efficiency of the CBOE
VIX as an investor fear gauge with respect to the stock market indices from a group of
developing nations, including BOVESPA (Brazil), AK&M composite index (Russia),
SENSEX (India), and Shanghai SE composite index (China). The study reports a strong
negative contemporaneous relation between changes in the VIX and the stock market index
returns in all the markets, although the evidence in the case of the Indian stock market was
found significant only during the period 19931997. However, it is noteworthy that this
relationship was examined using the CBOE VIX as a measure of investor fear in local
markets (such as Brazil, Russia, India, and China).

National Stock Exchange of India Ltd. has introduced a volatility index called India VIX in
April 2008. India VIX (IVIX) is a volatility index computed by NSE based on the order book
of NIFTY Options. It indicates the investors perception of the markets volatility in the near
term. From the best bid-ask prices of Nifty Options contracts, a volatility figure (annualized
%) is calculated which indicates the expected market volatility over the next 30 calendar days
or approximately 21 trading days. India VIX uses the computation methodology of CBOE,
with suitable amendments to adapt to the Nifty options order book. A high India VIX value
would suggest that the market expects significant changes in the Nifty, while a low India VIX
value would suggest that the market expects minimal change. It has also been observed that
historically, a negative correlation exists between the two.

In the Indian context, Kumar (2012) and Bagchi (2012) studied the India VIX and its
relationship with the Indian stock market returns. While Kumar (2012) shows the negative
association between the India VIX and stock market returns and the presence of leverage
effect significantly around the middle of the joint distribution, Bagchi (2012) constructs
value-weighted portfolios based on beta, market-to-book value and market capitalization
parameters, and reports a positive and significant relationship between the India VIX and the
returns of the portfolios. Banerjee and Kumar (2011) find that the implied volatility measure
is a sufficiently good predictor of realized volatility. Kumar (2010) examines the behavior of
India's volatility index by using linear regressions, autoregressive models and unit root tests.
The study tries to empirically answer whether VIX reflects certain characteristics known as
stylized facts of volatility. The results of the study show that the volatility index reproduces
almost all the stylized facts such as volatility persistence, mean reversion, negative
relationship with stock market movements and positive association with trading volumes.
Thenmozhi and Chandra (2013) examine the asymmetric relationship between the India VIX
and stock market returns, and demonstrate that Nifty returns are negatively related to the
changes in the India VIX levels; in the case of high upward movements in the market, the
returns on the two indices tend to move independently. This property of the India VIX makes
it ideal as a risk management tool whereby derivative products based on the volatility index
can be used for portfolio insurance against bad declines. They also find that the India VIX
captures stock market volatility better than traditional measures of volatility, including the
ARCH/GARCH class of models. Despite the usefulness of Indian VIX, there are few studies
investigating the application of India VIX. Moreover, the existing studies are based on
secondary data. Hence, the study conducts opinion survey of market participants on
usefulness of IVIX and IVIX futures.

2. Volatility Index

2.1 Development of VIX

The idea of constructing a volatility index from option prices emerges soon after the
introduction of exchange-traded index options. Gastineau (1977) proposes a volatility index
that averages the volatilities implied by at-the-money call options of 14 stocks, whereas Cox
and Rubinstein (1985) ameliorate the procedure by employing multiple call options on each
stock and by weighting the volatilities in such a fashion that the index is at the money with a
constant time to expiration. The Chicago Board Options Exchange began to introduce the
CBOE market volatility index (VIX) in 1993, which is used to measure market volatility
implied by at the money option prices that the future stock price volatility will be. Fleming et
al. (1995) and Whaley (1993) provided the methodology for the construction of the VIX. The
CBOE volatility indices depend on the implied volatilities of both call and put options (Xin,
2011).

Initially VIX was calculated as implied volatility backed out from the Black-Scholes option
pricing model. Since Black-Scholes model is based on the assumption of geometric Brownian
motion with constant volatility, the implied volatility from this model is at best an
approximation of the true risk-neutral volatility. Britten-Jones and Neuberger (2000)
provided a method for computing the risk-neutral expectation of the return variance from the
prices of European options without resorting to any option pricing model and only assuming
that the process is continuous. Especially, they proved that the risk-neutral expected sum of
squared returns over a future time period is given by a set of prices of options expiring at a
future date. An important advantage of this approach is that all available liquid options are
used instead of few options used in the earlier methodology. This approach became the basis
for construction of volatility indices, and CBOE was the first exchange to use the model-free
methodology to compute VIX. Subsequently this methodology has become the industry
standard with almost all the exchanges (barring a few exceptions such as the Montreal
Exchange that still uses Black-Scholes model to compute the volatility index) adopting the
same.

After years of development and improvement, the VIX index has been gradually accepted by
the stock markets participants. CBOE calculated several other volatility indexes including, in
2001 NASDAQ 100 index as the underlying volatility index (NASDAQ Volatility Index,
VXN), in 2003 the VIX index based on the S&P 500 Index, which is much closer to the
actual stock market than the S&P 100 Index, CBOE DJIA volatility Index (VXD), CBOE
Russell 2000 Volatility Index (RVX), and in 2004 the first volatility index futures. In 2006,
the VIX Index options began to trade in the Chicago Board Options Exchange. In 2008,
CBOE pioneered the use of the VIX methodology to estimate the expected volatility of some
commodities and foreign currencies. The popularity of the index is increasing and stock
exchanges of different countries have launched their own volatility index. The Australian
Stock Exchange, Deutsche Bourse, Hong Kong Stock Exchange, National Stock Exchange of
India, Euronext LIFFE, Taiwan Futures Exchange, and the TMX Group are examples of
some exchanges to use the VIX methodology. From their growing popularity it becomes
evident that VIX related products are becoming a truly global phenomenon.

2.2 Usefulness of Volatility Index

Volatility Index offers great advantages in terms of trading, hedging and introducing
derivative products on this index. Investors can use volatility index for various purposes.
First, investors portfolios are exposed to volatility of the market. Investors could hedge their
portfolios against volatility with an off-setting position in India VIX futures or options
contracts. Second, volatility index depicts the collective consensus of the market on the
expected volatility and being contrarian in nature helps in predicting the direction. Investors
therefore could appropriately use this information for taking trading positions. Third,
investors could also use the implied volatility information given by the index, in identifying
mispriced options. Fourth, short sale positions could expose investors to directional risk.
Derivatives on volatility index could help investors in safeguarding their positions and thus
avoid systemic risk for the market. Fifth, based on the experience gained with the benchmark
broad based index, sector specific volatility indices could be constructed to enable hedging by
investors in those specific sectors.
Since its inception VIX has become an indicator of how market practitioners think about
volatility. Investors use it to gauge the market volatility and base their investment decisions
accordingly. It is important to realize that the VIX is a measure of expected future volatility
but it also incorporates the uncertainty on the market triggered by various bank crashes and
crises. Simon (2003) argued that market participants tend to consider extreme values of VIX
as trading signals. Looking at the peaks of the realized variance, VIX is always under,
predicting that the realized levels of volatility during market turbulence were unsustainable.
Although some suggest that VIX is an accurate predictor of falling volatility, a more
thorough analysis is needed in order to draw such an important conclusion (Durand, Lim and
Zumwalt, 2011). As a measure of fear and complacency, VIX is often used as a contrarian
indicator: prolonged and/or extremely high VIX readings indicate a high degree or anxiety or
even panic among traders, and are regarded as a bullish indicator. Prolonged and/or
extremely low readings indicate a high degree of complacency, and are generally regarded as
a bearish indicator (Clorrado and Miller, 2006).

2.3 Futures Contract on Volatility Index

Globally exchanges are offering derivative products based on the volatility index such as VIX
futures and options. These products have become quite popular among the participants as it
expands the opportunities available to participants and provide efficient means to hedge
against volatility. Some studies have also shown that derivatives on volatility indices can be
useful for portfolio diversification and hedging. In India, NSE introduced IVIX futures
contracts on 26th February, 2014. India VIX Futures enables participants to more easily
hedge, trade and arbitrage the expected volatility. As stated by NSE, the benefits of India
VIX futures are; India VIX futures can be used to hedge equity portfolios, investors can
diversify the portfolio by adding India VIX futures, option traders can hedge vega risk in
their option portfolios, investors will be able to take directional views on volatility and
calendar spread trading can be explored across weekly contracts. The contracts on India VIX
futures are available for trading in the F&O segment of NSE.

In accordance with SEBI guidelines prescribing minimum contract size of Rs. 10 lakhs for
India VIX futures contracts, NSE periodically reviews the lot size based on the criteria. Like
other equity derivatives contract, India VIX futures are marked-to-market (MTM) on a daily
basis. The MTM is netted along with other equity derivatives contract at the clearing member
level. The contracts are cash settled. The daily settlement price of India VIX futures is the
weighted average price for last 30 minutes of the respective futures contract. If the contract
does not trade, then theoretical futures price is used for computation. The final settlement
price is the closing value of the India VIX index on the expiry day. The closing value of the
India VIX index is the average of the index values for last 30 minutes of trading. The contract
symbol is INDIAVIX and 3 weekly futures contract is made available for trading. The
contracts expire on every Tuesday.

3. Methodology

A questionnaire survey has been undertaken to collect opinion of investors on stock market
volatility in India, the usefulness of IVIX as predictor of future short-term volatility and
attractiveness of IVIX futures contract for trading volatility and hedging volatility risk. The
investors include institutional investors, brokers, sub-brokers and individual investors.
Hence, the study employs stratified sampling technique for sample selection. The
stratification variable is type of investor. From each stratum, sample is selected employing
convenience sampling approach. Hence, a sample of 500 respondents was selected and
questionnaire sent to them, however, response is received from only 197 respondents. Hence,
with the response rate of 39.4 percent, the final sample size for the study consists of 197
respondents. The sample comprises of 40 individual investors, 98 institutional investors, 20
brokers and 39 sub-brokers. The study uses structured questionnaire for data collection. The
questionnaire contains four sections; stock market volatility in India, India VIX, IVIX futures
and Respondents profile. The first section collects perception of the respondents on stock
market volatility in India. The second section collects opinion of the respondents on
usefulness of Indian VIX for predicting future stock market volatility. A seven item 5-point
Likert scale is used with response categories ranging from Strongly Agree to Strongly
Disagree. Similarly, the third section collects information on respondents view on the
attractiveness of trading IVIX futures contract with 5-point response categories ranging from
Strongly Agree to Strongly Disagree. Finally, the fourth section collects brief
information of the respondents. The descriptive statistics frequency, mean and standard
deviation are used to describe the scores of the questionnaire items. The one-way ANOVA is
used to test for differences in mean scores of responses among different investor types. The
F-test is employed to examine the differences in opinion of the investor type on stock market
volatility, usefulness of IVIX for forecasting future volatility and attractiveness of IVIX
futures for investment and hedging.

4. Results Discussion

4.1 Respondents Profile

Table I describes the profile of the sample investors. It is expected that the demographic and
investment profile of the investor influences the investment objective and investment
decision they undertake. Out of the total sample, 97 percent are male while only 3 percent are
female. It shows that male dominate the investment market in India. The age-wise
distribution shows that 84.8 percent of the investors are between 25 to 40 years of age.
Investors below 25 years are just 0.5 percent. Similarly, 55.3 percent of the sample
respondents have educational qualification of post graduate or higher. It reveals higher
percentage of investors have higher education.
 Table I: Description of Respondents Profile

Frequency Percentage Frequency Percentage

Gender Educational Qualification
Male 191 97 Graduate 88 44.7
Female 6 3 Post Graduate 109 55.3
Age Investment Experience
Less than 3
Below 25 years 1 0.5 years 5 2.5
25 to 40 167 84.8 3 to 6 years 60 30.5
More than 6
41 to 60 29 14.7 years 132 67
Occupation Monthly Income
50,000 to
Business 16 8.1 100,000 119 60.4
100,000 to
Professional 142 72.1 150,000 78 39.6
Serviceman 39 19.8 Investment Objective
Achieve high
Investment Duration
return 170 86.3
Moderate
Short Term 172 87.3 return 26 13.2
Long Term 25 12.7 Low returns 1 0.5

Regarding investment experience, 67 percent of respondents have investment history of more

than 6 years. Only 2.5 percent of sample respondents have investment experience of less than
2 years. It shows that higher percentages of investors in Indian stock market are experienced.
Most of the investors are found to have professional occupation. The percentage of business
and serviceman investing in Indian stock market is relatively low. High percentage of
investors is found to have short term investment horizon. Only 12.7 percent of investors
prefer to make long term investment. Finally, 86.3 percentage of respondents have
investment objective to achieve high return. Hence, investors in Indian stock market seem to
be willing to take higher risk for achieving their investment objective of superior return.
4.2 Stock Market Volatility in India

The survey reveals that high percentages of investors opine stock market of India to be highly
volatile and risky. The 83.8 percent of investors opine stock market to be very highly risky.
Similarly, 80.2 percentage of respondents find the stock market volatility to be very high.
None of the investors think that the Indian stock market has low risk and low volatility.
Finally, 65.5 percent of investors opine that occurrence of very high price fluctuations are
frequent in Indian stock market. Hence, investors perceive that Indian stock market is highly
volatility, stock price in the market changes frequently and hence, the market is highly risky.
Only 16.2 percent investors opine that the Indian stock market has high risk while none of the
investor perceive the stock market to have low risk. Similarly, only 19.8 percent investors
perceive the volatility in Indian stock market to be high while none of the respondents opine
the volatility to be low. Hence, the investors of the stock market in India perceive the market
to be volatile and risky and majority of the investors think the market is highly volatile and
risky.

Table II: Investor type-wise Differences in Perception on Volatility and Riskiness of

Indian Stock Market

Sub
Individual Institutional Broker Broker F-stat Sig.
Investment Risk 1.1750 1.2041 1.1000 1.0769 1.3210 0.2690

Volatility of Stock 1.1000 1.2143 1.3000 1.2051 1.3010 0.2750

Prices
Frequency of Large 1.8000 1.8980 2.0500 1.8718 0.8500 0.4680
Price Changes

The Table II presents the differences in perception of different investor type regarding risk
and volatility of the Indian stock market. The responses were measured in four-point scale
with 1 = highly risky/volatile and 4 = Less risky/volatile. The average score for the item
investment in Indian stock market is highly risky is 1.17, 1.20, 1.10 and 1.07 for individual,
institutional, brokers and sub-brokers respectively. It reveals that all the investor type
perceive the investment in the stock market to be highly risky. The result of one-way
ANOVA test employed to test for differences in mean scores for the item by investor type
reveals that no differences are present on view of the investor types regarding riskiness of
investment in Indian stock market. The sig. value associated with F-statistic shows that the
null hypothesis of no significant differences in mean scores for the item by investor types is
accepted. Hence, it is found that all investor type perceive the investment in stock market in
India to be highly risky. Similarly, the mean scores for all the investor type for the item
volatility of stock prices in Indian stock market are lower than 2. It indicates that they all
perceive the volatility of Indian stock market to be very high. The F-statistic is insignificant
and hence the null hypothesis of no statistically significant differences in the mean scores for
the item by investor type is accepted. Hence, it is revealed that all the investor type consider
stock prices movements in the Indian stock market to be highly volatile. Finally, the average
scores for the item frequency of large stock price changes in the Indian stock market are
approximately equal to 2 for all the four investor type. It indicates that the investors perceive
that the occurrence of large stock prices in the stock market is high. Overall, the results
demonstrate that all the investor types perceive stock prices to be highly volatile and hence
investment in the Indian stock market to be very risky.

4.3 Opinion of Investors on Indian VIX (IVIX)

The questionnaire survey asked the investors if they happen to know about IVIX. From a
total of 197 respondents, only 47.7 had familiarity with IVIX. Hence, further awareness of
usefulness of IVIX in risk analysis during investment decision is essential. It is seen that
brokers have the highest familiarity of IVIX followed by institutional investors. The sub-
brokers and individual investors are found to have less knowledge of IVIX. Only 7.5 percent
of individual investors are found to be familiar with IVIX. As IVIX is highly beneficial for
individual investors, educational programs on IVIX targeting individual investors are
essential. The reason for low familiarity of IVIX is it is relatively a new financial product as
NSE launched it in 2009. Additionally, investors may be less aware about usefulness of
forecasting future stock market volatility in investment decision and risk management.
Despite the high usefulness of IVIX for investors in India, its awareness and application in
investment decisions is found to be low.

Table III presents the average, minimum, maximum, mean and standard deviation figures for
opinion of investors on IVIX. The items on usefulness of IVIX is measured in a 5 point
Likert Scale with response category 1 = strongly agree and 5 = Strongly disagree. The mean
score for item high IVIX indicates higher risk in stock market investment is 1.2 which
indicates most of the respondent agree on the statement. The second item in which most of
the respondents agree is IVIX is good predictor of future short-term stock market volatility.
Hence, the responses of the two items reveal usefulness of IVIX in forecasting stock market
volatility. Additionally, the mean score for the item IVIX captures stock market volatility
better than traditional measures is 2.56 which shows that the sample respondents tend to
agree on this statement. Therefore, the survey reveals that IVIX is good predictor of future
stock market volatility. The mean score for the item, low IVIX is a bearish indicator is 3.76
which reveals that most investors tend to disagree with this statement. In consistency with the
results from the analysis of secondary data, the survey results reveal that IVIX is a bullish
indicator.

Table III: Investors Opinion on IVIX

Statements Min Max Mean Std.

Deviation
IVIX is good predictor of future short-term 2.00 4.00 2.24 0.52
stock market volatility
IVIX is useful in forecasting the future stock 2.00 4.00 2.80 0.71
market movements
High IVIX indicates higher risk in stock market 1.00 3.00 1.20 0.45
investment
Low IVIX is a bearish indicator 2.00 5.00 3.76 0.76
High IVIX is a bullish indicator 2.00 4.00 2.90 0.73
It can be misleading to use IVIX as a technical 3.00 4.00 3.49 0.50
indicator for future stock market volatility

IVIX captures stock market volatility better than 2.00 4.00 2.56 0.71
traditional measures

Finally, the sample respondents tend to disagree with the statement it can be misleading to
use IVIX as a technical indicator for future stock market volatility. The minimum and
maximum value for the item lies between 3 and 4 and the standard deviation is low. The
finding further supports the applicability of IVIX in forecasting future stock market volatility.
The mean score for the item IVIX is useful in forecasting the future stock market movements
is 2.80 which indicates that most investors tend to agree with the statement. The mean score
for the item high IVIX is a bullish indicator is 2.90 while the mean score for the item low
IVIX is a bearish indicator is 3.76. Hence, the investors agree that IVIX is a bullish indicator.
Overall, the mean scores show that investors agree that high IVIX means high risk in stock
market investment, IVIX has good predictive ability for future short-term volatility, IVIX is
better measure of volatility than traditional volatility indicators, IVIX is useful for investors
and high IVIX is a bullish indicator.

Table IV: Differences in Opinion of Investors on IVIX

Sub F-
Individual Institutional Broker Sig.
Broker stat
IVIX is good predictor of future 2.67 2.25 2.20 2.20 0.72 0.54
short-term stock market volatility
IVIX is useful in forecasting the 3.33 2.82 2.80 2.60 0.97 0.41
future stock market movements
High IVIX indicates higher risk in 1.00 1.25 1.07 1.20 0.83 0.48
stock market investment
Low IVIX is a bearish indicator 4.33 3.77 3.73 3.60 0.80 0.50

High IVIX is a bullish indicator 3.00 2.87 3.07 2.87 0.32 0.82

It can be misleading to use IVIX as 3.67 3.46 3.60 3.47 0.44 0.72
a technical indicator for future stock
market volatility
IVIX captures stock market 3.00 2.54 2.67 2.47 0.59 0.63
volatility better than traditional
measures

Table IV presents the comparison for mean scores for items for usefulness of IVIX and one
way ANOVA test used to examine the differences in mean scores for the items by investor
category. The null hypothesis for the test is there is no statistically significant difference in
means scores of opinion on applicability of IVIX as measured by the items by investor
category. The values of F-statistics and sig. values reveal that all the null hypotheses are
accepted. Hence, the results depict that no differences on view of different investor is present
regarding usefulness of IVIX. As the mean scores reveal, all the different categories of
investors agree on the statements IVIX is a good predictor of future short-term stock market
volatility, IVIX is useful in forecasting the future stock market returns and IVIX captures
stock market volatility better than traditional measures.
The means score for the item IVIX is good predictor of future short term volatility for
individual, institutional, broker and sub-brokers are 2.67, 2.25, 2.20, and 2.20 respectively.
Broker and sub-broker tend to relatively agree more on the usefulness of IVIX while
individual investors tend to relatively agree less on the statement. Similarly, for the item
IVIX is useful in forecasting the future stock market movements, broker and sub-broker tend
to agree more as compared to institutional investors. On the contrary, individual investors
tend to disagree on this statement as revealed by their mean score of 3.33.

For the item high IVIX indicates higher risk in stock market investment the mean scores are
1.00, 1.25, 1.07, and 1.20 for individual, institutional, broker and sub-broker investors
respectively. The individual investors and brokers tend to agree more on this statement while
the institutional investors have relatively lower agreeness. All the investor types disagree on
the item low IVIX is a bearish indicator as all the mean scores for the item is larger than 3.
For the item high IVIX is a bullish indicator, the sub-broker and institutional investor tend to
agree as the mean scores for them is less than three while individual investors and brokers
tend to disagree as revealed by their mean scores which are larger than 3.

In case of the item it can be misleading to use IVIX as a technical indicator for future stock
market volatility, all the investor type disagree with the statement as revealed by their mean
scores larger than 3. The individual investors have the highest mean score of 3.67 for the item
which shows that they disagree with the statement the most. Finally, for the statement IVIX
captures stock market volatility better than traditional measures like standard deviation, all
investors except individual investors agree. The individual investor have mean score of 3 for
the item which reveals they neither agree nor disagree with the statement.

Although differences exist on the view of the different sampled investor type regarding
usefulness of IVIX, the results cant be generalized to the study population as the F-statistics
is insignificant for all the items. Hence, the study reveals that different types of investors
have similar opinion on the usefulness of IVIX. Overall, the key results of the table reveal
that the mean score for the item low IVIX is a bearish indicator reveals that most investors,
especially, individual investors tend to disagree on this statement. Similar results are seen for
the item it can be misleading to use IVIX as a technical indicator for future stock market
volatility. Overall, the mean scores figure reveal that sub broker and broker agree more on
usefulness of IVIX while individual investors tend to disagree on the application of IVIX.
Hence, the findings reveal that in general the investors perceive IVIX to be useful tool,
however, the awareness needs to be created for individual investors on usefulness of IVIX.

4.3 Opinion of Investors on IVIX Futures

The survey results reveal that only 6.1 percent of the sample respondents have invested in
IVIX futures. It reveals that IVIX futures contract is not a popular investment vehicle in India
despite its wide ranging application in investment, volatility risk hedging and arbitrage. It is
found that among the sample respondents who trade in IVIX futures, broker and institutional
investors are major investor category that makes investment in the derivative security. The
results show that among the brokers, only 25 percent make investment in IVIX futures while
only 6.1 percent of institutional investors invest in the security. Similarly, only 2.6 percent of
sub-brokers invest in IVIX futures. However, none of the sample respondents in individual
investor category are found to trade in IVIX futures contracts. The lack of awareness of
application of IVIX futures contract on volatility risk hedging, its complexity and lot size are
considered hindrance for individual investors trading in IVIX futures contracts. Around 83
percent of the respondents opine that high lot size of futures contract specification is a major
factor that makes individual investors attraction in IVIX futures less. The lot size for IVIX
futures is 750 contracts. The minimum amount for entering taking position in IVIX futures
contract is Rs. 10 lakh which is a major hindrance for individual investors.

Table V presents the descriptive statistics of the sample respondents opinion on IVIX
futures. The responses were measured in 5 point Likert scale with response category 1 =
Strongly agree and 5 = Strongly disagree. It is found that most of the investors who trade in
IVIX futures respond favorably on usefulness of IVIX futures as an investment tool as the
average item scores are less than 2 for all the items. The investors tend to strongly agree on
statements IVIX futures offer opportunity to earn profit from stock market volatility and
IVIX futures has less liquidity. As market depth for IVIX futures is low, it has less liquidity
despite its short expiry period.
 Table V: Descriptive Statistics for Respondents Opinion on IVIX Futures

Statements Min Max Mean Std.

Deviation
Volatility trading is useful for individual 1.00 3.00 1.92 0.79
investors
Volatility trading is useful for institutional 1.00 3.00 1.58 0.67
investors
IVIX futures offer opportunity to earn 1.00 3.00 1.42 0.67
profit from stock market volatility.
IVIX futures provide efficient mean to 1.00 3.00 1.83 0.58
hedge against stock market volatility.
IVIX futures are useful for portfolio 1.00 3.00 1.83 0.58
diversification
IVIX futures has less liquidity 1.00 3.00 1.42 0.67
Complexity of IVIX futures contract has 1.00 3.00 1.92 0.51
resulted in less investor participation

Investment in IVIX futures provides 1.00 3.00 1.92 0.67

higher returns

Similarly, the investors tend to highly agree on the statements volatility trading is useful
institutional investors. Institutional investors primarily use IVIX futures to minimize risk of
their portfolio arising from market volatility. The mean scores for items volatility trading is
useful for individual investors, complexity of IVIX futures contract has resulted in less
investor participation, and investment in IVIX futures provides higher returns is relatively
low. However, the investors agree on these statements as the average scores for the items are
lower than 2. The minimum and maximum values for all the items lie between 1 to 3.
Moreover, the values of standard deviations are low which indicates that there is less
deviation on the respondents opinion regarding IVIX futures contract. Overall, the results
show that IVIX futures is useful instrument for investment and risk management.

Table VI presents the differences in opinion of different investor types on attractiveness of

IVIX futures. The investor types who invest in IVIX futures are institutional investor, broker
and sub-broker. Individual investors are found not to invest in IVIX futures. The mean scores
for the item volatility trading is useful for individual investors are 2.00, 1.60 and 3.00
respectively. It means brokers have the highest level of agreement for the statement followed
by institutional investors. Sub-brokers neither agree nor disagree with the statements.
Similarly, the mean scores for the item volatility trading is useful for institutional investors
are 1.50, 1.60, and 2.00 for institutional, broker and sub-broker investors respectively. It
reveals that all the investors have high level of agreement with this statement while
institutional investors have relatively the highest degree of agreement.

The mean scores for all the three investor types for the item IVIX futures offer opportunity to
earn profit from stock market volatility is lower than 2 which means they all agree highly on
the statement. The sub-broker have the highest level of agreement while broker have
relatively lower agreement with the statement. Similarly, all the mean scores for the item
IVIX futures provide efficient mean to hedge against stock market volatility are also lower
than 2 which reveal high level of agreement with the statement. The institutional investors
tend to agree the most with this statement. Similar results are obtained for the item IVIX
futures are useful tool for portfolio diversification. For the statement also institutional
investors display the highest level of agreement.

Similarly, the investors show high level of agreement for the items IVIX futures has less
liquidity, complexity of IVIX futures contract has resulted in less investor participation and
investment in IVIX futures provides higher returns as the average scores for these items for
all the investor types are below 2. Sub-brokers have relatively higher level of agreement with
the item IVIX futures has less liquidity while institutional investors have relatively higher
level of agreement with the items complexity of IVIX futures contract has resulted in less
investor participation and investment in IVIX futures provides higher returns.
 Table VI: Differences in Respondents Opinion on IVIX Futures

Statements Sub
Institutional Broker Broker F-stat Sig.
Volatility trading is useful for 2.00 1.60 3.00 1.49 0.28
individual investors
Volatility trading is useful for 1.50 1.60 2.00 0.21 0.82
institutional investors
IVIX futures offer opportunity to 1.33 1.60 1.00 0.38 0.69
earn profit from stock market
volatility.
IVIX futures provide efficient 1.67 2.00 2.00 0.45 0.65
mean to hedge against stock
market volatility.
IVIX futures are useful for 1.67 2.00 2.00 0.45 0.65
portfolio diversification
IVIX futures has less liquidity 1.17 1.80 1.00 1.59 0.26
Complexity of IVIX futures 1.83 2.00 2.00 0.13 0.88
contract has resulted in less
investor participation
Investment in IVIX futures 1.83 2.00 2.00 0.08 0.93
provides higher returns

In summary, the Table VI shows the output of one-way ANOVA test employed to examine
the differences in opinion towards IVIX futures by investor category. All the F-statistics are
found to be insignificant hence the null hypothesis of no significant difference in mean scores
of items on usefulness of IVIX futures by investor category has been accepted. It reveals that
the investors who trade in IVIX futures have similar opinion on its usefulness and investment
features. However, the average item scores by investor category show that institutional and
brokers relatively agree more on the items. Hence, it indicates that trading in IVIX futures is
majorly done by institutional investors and brokers. Finally, 83.3 percentage of the sample
respondents who invest in the derivative security state that they use IVIX futures mainly for
speculation motive. The IVIX futures is used earn profit from volatility in the stock market.
The second use of IVIX futures is found to be hedging. The 75 percent of the traders in the
security are found to use it for hedging risk of their portfolio. IVIX futures offer opportunity
to hedge volatility risk of their portfolio. Finally, 25 percent of the respondents are found to
use IVIX futures for arbitrage.

5. Conclusions

The results show that the India VIX is a good indicator of future short-term stock market
volatility. It has higher predictability for upward movement in stock indices as compared to
downward movements. Hence, IVIX is more a bullish indicator. Despite the usefulness of
IVIX, its familiarity with investors, especially individual investors is low. IVIX is perceived
to be a better indicator for future stock market volatility as compared to traditional measures
of volatility. The IVIX futures contract which is a derivative product based on IVIX is
attractive to investors for volatility trading and portfolio risk management. However, very
few investors are found to invest in IVIX futures. The lot size of the IVIX futures and its
complexity are major hindrances for individual investors. The institutional investors are
major investors in IVIX futures and it is used primarily for speculative motive relative to
hedging volatility risk.

As IVIX is found to have good forecasting ability for future short-term volatility investors
should make trading decisions based on IVIX. The IVIX futures contract should be used to
hedge their portfolios against volatility risk. Despite, the usefulness of the volatility products,
their awareness and use is very low in India. Hence, programs to create awareness about the
products, especially, for individual investors should be conducted. The lot size requirement of
IVIX futures should be revised in order to make it attractive for individual investors.
Currently, only IVIX futures contract is available as derivative products on IVIX. The stock
exchanges and regulators should develop more products based on IVIX so that investors will
have wider choices of financial assets for volatility trading. The IVIX futures contract are
found to be mainly used for speculation, hence the use of IVIX futures for hedging risk of
portfolios from future stock market volatility should be promoted. Policymakers should
formulate polices that facilitate reduction of volatility at the Indian stock market so that
confidence of investors in the market is developed.
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