Reflexivity and Interactions in Modern Financial Markets: the Case of Volatility Indices

digital

Article

Magazine

RIVISTA INTERNAZIONALE DI SCIENZE SOCIALI

Fascicle

RIVISTA INTERNAZIONALE DI SCIENZE SOCIALI - 2018 - 3

Title

Reflexivity and Interactions in Modern Financial Markets: the Case of Volatility Indices

Authors

Luca Bagato, Alessio Gioia, Enrico Mandelli

Publisher

Vita e Pensiero

Format

Article |

Pdf

Online from

02-2019

Doi

10.26350/000518_000013

Issn

0035-676X (print) | 1827-7918 (digital)

€ 6.00

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Description

Reflexivity Theory rejects the basic assumption of the classical theory that financial markets totally and instantaneously absorb the information flow expressing an equilibrium price for each asset class. In this study we empirically investigate the presence of Reflexivity among Volatility Indices, Equity Indices and other economic and financial indicators, such as the US Economic Policy Uncertainty Index. We introduce a multi-step statistical model able to recognize stressed market periods and identify breakout points and short-term trend and reversal signals. We also investigate reverse causality and the response of our model to volatility shocks. Our conclusions are oriented towards a confirmation of Reflexivity Theory in the historical time series of listed Volatility Indices.