Nov 1, 2010

MOVE Index, Part 2

My last post was about predicting VIX index using MOVE index where I posted a basic model for VIX fair value. MOVE closed last week at 99.80 (Bloomberg) , implying VIX price of 20.98. Of course to use the model one needs to investigate the average error. To do that I used 10K bootstrap regressions to figure out mean absolute error of 4.72(histogram below). While not amazingly accurate, VIX fair value model is good enough as a basic cheap/expensive indicator. Since the current VIX value is well within the error of the forecast, it is clear that equity implied volatility is in line with the Treasury markets.

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