Modeling Regime Structure and Informational Drivers of Stock Market Volatility via the Financial Chaos Index
This provides a unified empirical perspective on systemic uncertainty in financial markets, but it is incremental as it builds on existing volatility measures and regime-switching models.
This paper tackles the problem of understanding stock market volatility by developing a regime-switching framework using the Financial Chaos Index to identify three distinct market regimes (low-, intermediate-, and high-chaos) from 1990 to 2023, and finds that sentiment-based predictors strongly forecast implied volatility across these regimes.
This paper investigates the structural dynamics of stock market volatility through the Financial Chaos Index, a tensor- and eigenvalue-based measure designed to capture realized volatility via mutual fluctuations among asset prices. Motivated by empirical evidence of regime-dependent volatility behavior and perceptual time dilation during financial crises, we develop a regime-switching framework based on the Modified Lognormal Power-Law distribution. Analysis of the FCIX from January 1990 to December 2023 identifies three distinct market regimes, low-chaos, intermediate-chaos, and high-chaos, each characterized by differing levels of systemic stress, statistical dispersion and persistence characteristics. Building upon the segmented regime structure, we further examine the informational forces that shape forward-looking market expectations. Using sentiment-based predictors derived from the Equity Market Volatility tracker, we employ an elastic net regression model to forecast implied volatility, as proxied by the VIX index. Our findings indicate that shifts in macroeconomic, financial, policy, and geopolitical uncertainty exhibit strong predictive power for volatility dynamics across regimes. Together, these results offer a unified empirical perspective on how systemic uncertainty governs both the realized evolution of financial markets and the anticipatory behavior embedded in implied volatility measures.