Fear and ambiguity in the Norwegian stock market

Abstract

When dealing in financial markets, knowing how much fear and ambiguity there is can be crucial. The reason for this is that when ambiguity increases to the point where it becomes fear, things can happen very fast in these markets. Over the years, considerable amounts of effort have been put in to measuring and predicting these emotions, and perhaps the most famous is the volatility index (VIX) based on S&P 500 index options. Since the VIX came there have been many replicas in other markets, but to our knowledge there have never been one for the Norwegian market. In this thesis we want to correct this, and in addition we want to look at other possibilities for measuring fear and ambiguity in the Norwegian market. We therefore defined the following problem: Can we measure fear and ambiguity in the Norwegian stock market?

In this thesis we make the following three contributions: First we survey the most recent literature on decision theory and risk-taking, including papers published in 2011. Second, we extend existing empirical risk research by constructing VIX and FEARS measures for the Norwegian market, which we name NVIX and NFEARS. Third we evaluate the comparative performance of our fear and ambiguity measures in Norway.

The main part of this thesis is about constructing and performing econometrical analysis on the NVIX. Especially the construction was very time consuming and it involved; retrieving and sorting all the index option trades made on the OBX from 1997-2012; learning how to make a volatility index through reading the “VIX White” made public on the CBOE website; making some sample NVIX values in excel; learning how to use SAS (Statistical Analysis Software); and finally making the NVIX in SAS. All of these points took a lot of time, but since we had no experience in using SAS the two latter points were particularly time consuming. In addition we attempt to measure investor sentiment by making the NFEARS, which consists of various negative economical search words made in Google. When the NVIX and NFEARS is made we test them using correlation and econometrical analysis.