Causality between stock market and “fear gauge” indices: An empirical analysis with E-statistics

Abstract

This study investigates empirically the validity of three hypotheses that have been advanced to explain the tendency of stock market and volatility indices to move in opposite directions, using the notion of Brownian distance correlation. We consider three stock market-implied volatility index pairs, namely, the S&P 500 and the VIX, the DAX 100 and the V1XI, and the N225 and the JNIV. The empirical results support the leverage hypothesis relative to the volatility feedback hypothesis for the pairs S&P 500 and VIX, and N225 and JNIV, and the representativeness and affect heuristics hypothesis relative to the leverage hypothesis for the pairs DAX 100 and V1XI, and N225 and JNIV.