Market-Implied Information Shocks and Volatility Dynamics

Xiangyue Liu

Co-Presenters: Individual Presentation

College: College of Business and Public Management

Major: BS.FINANCE

Faculty Research Mentor: Abootaleb Shirvani

Abstract:

Abstract
Financial markets exhibit time-varying volatility that reflects both internal market dynamics and the arrival of new information. While classical time-series models are effective at capturing volatility persistence, it remains an open question whether externally generated information provides additional insight into market risk. This undergraduate research project examines the role of market-implied information shocks, measured using changes in the VIX index, in modeling and forecasting equity market volatility.
Using daily data for the U.S. stock market, the project constructs information shocks from log-changes in the VIX, which reflects option-market expectations of future uncertainty. These information measures are incorporated into a stochastic time-series framework and compared with standard volatility models that rely solely on past returns. The analysis focuses on model structure, interpretation, and forecast evaluation within a disciplined quantitative framework.
The project aims to evaluate whether market-implied information shocks provide incremental explanatory and predictive value for equity market volatility beyond historical price dynamics. By integrating information measures into a stochastic time-series framework, the study seeks to offer a transparent and model-based approach to examining how information arrival influences market risk. Emphasis is placed on reproducible methods and clear economic interpretation, making the project well-suited for an undergraduate research setting.