Does the CBOE Volatility Index Predict Downside Risk at the Tokyo Stock Exchange?

Abstract

This study investigates the predictability of the preceding day’s US volatility index (VIX) from the Chicago Board Options Exchange (CBOE) for sharp price drops of the Tokyo Stock Price Index (TOPIX) by employing several versions of probit models. All our results indicate that the preceding day’s US S&P 500 VIX movement has predictive power for sharp price declines of the TOPIX in Japan. As we repeatedly examined several left tail risks in TOPIX price changes and we also tested by applying some different versions of probit models, our evidence of the forecast power of the S&P 500 VIX for downside risk of the TOPIX shall be very robust.