Stock market volatility index vix

Stock market volatility index vix

Author: Elena Date of post: 28.05.2017

It is colloquially referred to as the uncertainty index, the fear index or the fear gauge. The formulation of a volatility index, and financial instruments based on such an index, were developed by Menachem Brenner and Dan Galai in and described in academic papers. A volatility index would play the same role as the market index play for options and futures on the index.

In , Brenner and Galai proposed to the American Stock Exchange the creation of a series of volatility indices, beginning with an index on stock market volatility, and moving to interest rate and foreign exchange rate volatility. In , Brenner and Galai met with Joseph Levine and Deborah Clayworth at the Chicago Board of Options Exchange to propose various structures for a tradeable index on volatility; those discussions continued until The current VIX concept formulates a theoretical expectation of stock market volatility in the near future.

The CBOE retained consultant Robert Whaley in to develop a tradable volatility instrument based on index option prices. Based on historical index option prices, Whaley has computed a data series of retrospective daily VIX levels from January onward. The VIX is calculated and disseminated in real-time by the Chicago Board Options Exchange. On March 26, , the first-ever trading in futures on the VIX began on CBOE Futures Exchange CFE. As of February 24, , it became possible to trade VIX options contracts.

Several exchange-traded funds seek to track its performance. The formula uses a kernel -smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The VIX is calculated as the square root of the par variance swap rate for a day term [ clarify ] initiated today.

Note that the VIX is the volatility of a variance swap and not that of a volatility swap volatility being the square root of variance, or standard deviation.

A variance swap can be perfectly statically replicated through vanilla puts and calls whereas a volatility swap requires dynamic hedging. The VIX is quoted as an annualized standard deviation. The VIX has replaced the older VXO as the preferred volatility index used by the media. Statistician Salil Mehta of Statistical Ideas shows the distribution of the VIX. The price of call and put options can be used to calculate implied volatility, because volatility is one of the factors used to calculate the value of these options.

Higher or lower volatility of the underlying security makes an option more or less valuable, because there is a greater or smaller probability that the option will expire in the money i. Thus, a higher option price implies greater volatility, other things being equal. Even though the VIX is quoted as a percentage rather than a dollar amount, there are a number of VIX-based derivative instruments in existence, including:.

VIX - Wikipedia

Although the VIX is often called the "fear index", a high VIX is not necessarily bearish for stocks. In practical terms, when investors anticipate large upside volatility, they are unwilling to sell upside call stock options unless they receive a large premium. Option buyers will be willing to pay such high premiums only if similarly anticipating a large upside move. The resulting aggregate of increases in upside stock option call prices raises the VIX just as does the aggregate growth in downside stock put option premiums that occurs when option buyers and sellers anticipate a likely sharp move to the downside.

When the market is believed as likely to soar as to plummet, writing any option that will cost the writer in the event of a sudden large move in either direction may look equally risky. Hence high VIX readings mean investors see significant risk that the market will move sharply, whether downward or upward. The highest VIX readings occur when investors anticipate that huge moves in either direction are likely.

Only when investors perceive neither significant downside risk nor significant upside potential will the VIX be low.

$VIX CBOE Volatility Index stock and investing information on StockTwits (VIX)

Chow, Jiang and Li [9] demonstrated that without imposing any structure on the underlying forcing process, the model-free CBOE volatility index VIX does not measure market expectation of volatility but that of a linear moment-combination. Particularly, VIX undervalues overvalues volatility when market return is expected to be negatively positively skewed.

Alternatively, they develop a model-free generalized volatility index GVIX.

With no diffusion assumption, GVIX is formulated directly from the definition of log-return variance, and VIX is a special case of the GVIX. Empirically, VIX generally understates the true volatility, and the estimation errors considerably enlarge during volatile markets. In addition, the spread between GVIX and VIX GV-Spread follows a mean-reverting process.

stock market volatility index vix

VIX is sometimes criticized in terms of it being a prediction of future volatility. It is a measure of the current price of index options. Despite their sophisticated composition, critics claim the predictive power of most volatility forecasting models is similar to that of plain-vanilla measures, such as simple past volatility.

Some practitioners and portfolio managers seem to completely ignore or dismiss volatility forecasting models. For example, Nassim Taleb famously titled one of his Journal of Portfolio Management papers We Don't Quite Know What We are Talking About When We Talk About Volatility.

In a similar note, Emanuel Derman expressed his disillusion with the enormous supply of empirical models unsupported by theory.

Michael Harris has argued that VIX just tracks the inverse of price and it has no predictive power as a result. VIX should have predictive power as long as the prices computed by the Black-Scholes equation are valid assumptions about the volatility predicted for the future lead time the remaining time to maturity.

Shiller argues that it would be circular reasoning to consider VIX to be proof of Black-Scholes, because they both express the same implied volatility. He also finds that calculating VIX retrospectively in does not predict the highest-ever volatility of the Great Depression , due to the anomalous conditions of the Great Depression itself, and we thus have no confidence in VIX to predict, even weakly, such severe events if they should occur in the future.

VIX (CBOE Volatility Index)

In and , VIX Futures and VIX Options, respectively, were named Most Innovative Index Product at the Super Bowl of Indexing Conference. From Wikipedia, the free encyclopedia.

For other uses, see Vix disambiguation. Retrieved from " https: American stock market indices Derivatives finance Mathematical finance Technical analysis. Pages using web citations with no URL Pages using citations with accessdate and no URL All Wikipedia articles needing clarification Wikipedia articles needing clarification from November NPOV disputes from August All NPOV disputes.

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^VIX : Summary for VOLATILITY S&P - Yahoo Finance

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