Breaking VIX at Open: Evidence of Uncertainty Creation and Resolution

We decompose daily (close-to-close) changes of VIX into overnight (close-to-open) and trading-hour (open-to-close) changes. Consistent with the notion that non-trading creates uncertainty and trading resolves uncertainty, we find that on average VIX increases overnight and decreases during trading hours. More importantly, we document an important seasonality in VIX, i.e., the non-trading day effect. Overnight increase of VIX involving weekends or holidays is significantly higher than that over two consecutive trading days. We also document that VIX exhibits a clear pattern around pre-scheduled overnight and trading-hour macroeconomic announcement. Finally, we show that breaking VIX changes into overnight and trading-hour components and incorporating the non-trading day effect lead to not only significant improvements in in-sample fitting but also superior performance of out-of-sample-forecasting and active trading strategies.