Is Fear (VIX) a Priced Factor in Multi Factor Asset Price Modeling?

Abstract

This study examines the effect of volatility measure VIX in the Fama and French model augmented by Durand et al. (2011) in the Indian stock market. It also tries to investigate the pricing effects and dynamic interaction of the volatility factor (VIX or market anxiety} vis. a vis. other priced factors of Fama and French (1993) by using regression methods, Granger causality test, vector auto regression method, and impulse response function method. Results indicate that the Impact of risk/volatility (RVIX) is negative and consistent on almost all the portfolios, which is in congruence with the findings of Durand etal. (2011 ), Giot (2005), and Whaley (2000, 2008). The shocks offear are found to be persistent for two to three consecutive months, and this is consistent with the findings of Whaley (2000, 2008). Thus, the results strongly advocate for the inclusion of change of VIX as a priced factor in the asset pricing models in India as well.