The study aims to construct an Indian Market Volatility Index (IMVI) for the Indian stock market using the Nifty option series which are based on the S&P CNX Nifty Index. The study also aims to validate the predictive properties and effectiveness of IMVI. The results of this study are expected to offer guidance for the future researchers in the area of market microstructure. Though this study focuses on constituting the index on a daily basis, the index can be further developed for continuous prediction.

At present, India's economy looks upbeat with an increase in investment in the stock market. At the same time, it is also seen that the market fluctuations are very high. Such high levels of fluctuations or volatility make it difficult to predict the future expected values of the market and make investment decisions. Similarly, volatility is an important component for estimating the option price using the Black Scholes model. In such a situation, having an estimate of future volatility is very useful. Similar to the price indices that are used as indicators of the overall market value and returns, volatility indices are used as indicators of expected market volatility over a future period. Such indices exist in the US and the European countries. The CBOE Volatility Index or VIX is the first volatility index of its kind providing volatility forecasts on a continuous basis for the Chicago Board of Exchange. The present study looks into the aspect of construction of such an index in the Indian context.

Volatility is the tendency for the prices to change with respect to new information. Price changes occur due to access to new information regarding values of the underlying asset or due to the demand for liquidity by impatient traders. In the areas of investment, security valuation, risk management, and financial intermediation, forecasting volatility is the central idea of research, because to assess investment risk, a good forecast of the volatility of asset price serves as a key input. Volatility affects the investment returns as well as the risk from the investment. Excessive volatility in the market indicates that there is an erratic demand and supply in the market and hence the markets are not functioning well. (Harris Larry, 2002)

Applied Finance Journal, Indian Stock Market, European Countries, Chicago Board of Exchange, Indian Market Volatility Index, Risk Management, Derivatives Market, Frequency Index Returns, Stock Market Returns, Implied Volatilities.