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In equating the VIX to the Doow..I merely took the % daily and applied
it too the Dow. Converting OEX moves to Dow moves would subject the
calculation to tracking error.
There is actually a DIX and obviously one could publish and calculate a
vol index of anything with a robust enough oorder flow.
Many wall street firms actually trade volatility bets in the major
indexes where Vega can be bought and sold. You find that generally the
trends in implied track well...not perfectly but well. OEX in fact has
the greaterst vol of vol because of the character of the orderflow.
There is also a cottage industry that trades vol spreads between the
actual and the implied. Of course when thinking about it the only non
forward projection trade would be actual versus implied.
There is amajor business of vol projection. Back to GARCH and E GARCH
vol projection. The quants I know on Wall Street say they work very
very well. The academic work seems to support it's viability. The
concern I have with using vol a technical indicator is that from what I
understand of the GARCH work is that it introduces a series of market
related(non vol)variables. If those systems work as claimed then
modeling vol to project vol should be problematic. I've always been and
remain somewhat skeptical about using to vol(except at extreme
levels)itself as a tool for trading. I trade a good deal and it is a
really important variable. From time to time it is the critical
variable(as over the last few weeks), but often it is of no value.
The classic work on using pure vol to forecast was the work done by Jim
Yates(The Option Strategy Spectrum)and the result there were rarely
satisfactory. In fact they were frequently devastating.
If you can put your hands on the best GARCH work(stuff like the studies
done at Goldman, Morgan and Salomon Bros)that comes from wall street
firms you will see they are pretty good. You also see that there are a
lot of other inputs to the model than purely implied.
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