Use VIX as the Signal to Build Up the Strategy in Taiwan Stock and Option Market

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This article examines the predictive power of TVX (Taiwan Volatility Index) for the following cumulative returns and the frequency of wins on the Taiwan stock and future market over one to five horizons form January 2003 though December 2003. If the market was marked as fear, we expect the next future return will tend to be positive when we set up a long position. On the contrary, if it was regarded as greed, the next future return will tend to be negative then we adopt a short trading strategy. We apply TVX、the difference of TVX ( TVX) and spreads between implied volatility of put and call (TVX_p－TVX_c) to explore the relationship between risk and return. The empirical results show that if these indicators are extreme low and high level which are compared with the pass, no matter stock index or future index will be likely to reverse. It’s means VIX provide the ability to forecast index direction. Finally, we observe the volatility spreads in the Taiwan stock index option market. The results of empirical test find that when volatility spreads increase, it’s a successful strategy to long call and short put. The abnormal return have statistically and economically significant, and the sellers always win.