Volatility Analysis of the Nifty 50 index

Talking Spot Vol correlations and combinations as a predictive factor.

Does current day vol return predict next day index returns?

We should expect there to be a negative correlation here because as vol moves down, we expect the index to have moved up, and due to a minor trend effect, we can expect the next day to move up as well. Let's see what the data shows us.

This is a positive correlation, which is the opposite of what we expected. Does this mean spot vol correlation doesn't hold? Since this is a small correlation, it might just be the force fit due to outliers, let's restrict the data to inside the blob.

Okay, so looks like the relationship is even more pronounced for non-outlier days. Let's keep this in our back pocket for a bit now and actually check for spot-vol correlation.

Does Spot Vol Correlation hold?

We should expect there to be significantly more 'Vol Down, Day Up' and 'Vol Up, Day Down' combinations than the other two.

We do not see that either. I am probably doing something wrong here, so let's revisit it after I talk to some more learned people.

Does a particular spot-vol combination predict next day returns?

What we see here is interesting, On Vol Down Days, especially in the vol down, day down combination, there is (relatively) fatter positive tail, while the opposite is true for Vol Up Days. This kind of confirms the spot-vol correlation + trend effect. Conflicting signals there.

Also hard to see in this plot, but it looks like some combination have a positive expected mean of the next day returns, let's plot that and see.

:wink: