# Quant Investing: the Decomposition of VIX

This report tries to shed light on volatility by examining the result of a research paper: “* Reading VIX: Does VIX Predict Future Volatility?*“. Volatility has long shown the phenomenon of mean-reverting. With the advent of the VIX index, incorporating the mean-reverting property of volatility and trading information from VIX might provide us superior forecast.

The paper proposed a decomposition of VIX and offer a new indicator of future volatility “VCR”. However, after a series of experiments, we found that the predictive power of VCR is not plausible comparing to volatility premium with a simpler calculating method.

Furthermore, the asymmetry of its performance which is better conditional on negative volatility change shows that the **“VCR” might only reflect the “volatility mean-reverting ” phenomenon with a more complicated approach.**

To know the predictability of the simple volatility premium relative to other volatility models, we also compare the result to the GARCH(1,1) model. It turns out that this simpler approach even performs better than the more sophisticated model.

**Hence, we conclude that simply subtracting VIX to currently volatility can be useful to determine future volatility level.**

*Reading VIX®: Does VIX Predict Future Volatility? (Tim Edwards, 2017)*

YC Lin*AVP Quantitative Finance*, **Gamma Paradigm**

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