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VIXWikipedia

VIX
FromWikipedia,thefreeencyclopedia

VIXisatrademarkedtickersymbolfortheCBOEVolatility
Index,apopularmeasureoftheimpliedvolatilityofS&P
500indexoptionstheVIXiscalculatedbytheChicago
BoardOptionsExchange(CBOE).Oftenreferredtoasthe
fearindexorthefeargauge,theVIXrepresentsonemeasure
ofthemarket'sexpectationofstockmarketvolatilityoverthe
next30dayperiod.
Theideaofavolatilityindex,andfinancialinstruments
basedonsuchanindex,wasfirstdevelopedanddescribedby
ProfessorMenachemBrennerandProf.DanGalaiin1986.
ProfessorsBrennerandGalaipublishedtheirresearchinthe
academicarticle"NewFinancialInstrumentsforHedging
ChangesinVolatility,"whichappearedintheJuly/August
1989issueofFinancialAnalystsJournal.[1]

CBOEVolatilityIndex(VIX)19852012.

Inasubsequentpaper,ProfessorsBrennerandGalaiproposedaformulatocomputethevolatilityindex.[2]
ProfessorsBrennerandGalaiwrote"Ourvolatilityindex,tobenamedSigmaIndex,wouldbeupdated
frequentlyandusedastheunderlyingassetforfuturesandoptions...Avolatilityindexwouldplaythesame
roleasthemarketindexplayforoptionsandfuturesontheindex."
In1992,theCBOEretainedVanderbiltUniversityProfessorRobertWhaleytodevelopatradablestockmarket
volatilityindexbasedonindexoptionprices.AtaJanuary1993newsconference,Prof.Whaleyprovidedhis
recommendations,andsubsequently,theCBOEhascomputedVIXonarealtimebasis.Basedonthehistoryof
indexoptionprices,Prof.WhaleycomputeddailyVIXlevelsinadataseriescommencingJanuary1986,
availableontheCBOEwebsite.Prof.Whaley'sresearchfortheCBOEappearedintheJournalof
Derivatives.[3]
TheVIXisquotedinpercentagepointsandtranslates,roughly,totheexpectedmovementintheS&P500
indexovertheupcoming30dayperiod,whichisthenannualized."VIX"isaregisteredtrademarkofthe
CBOE.[4]

Contents
1
2
3
4
5
6
7
8
9

Specifications
Interpretation
LimitationandGVIX
Criticisms
History
Seealso
Bibliography
References
Externallinks

Specifications
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TheVIXiscalculatedanddisseminatedinrealtimebytheChicagoBoardOptionsExchange.Theoreticallyit
isaweightedblendofpricesforarangeofoptionsontheS&P500index.OnMarch26,2004,thefirstever
tradinginfuturesontheVIXbeganonCBOEFuturesExchange(CFE).AsofFebruary24,2006,itbecame
possibletotradeVIXoptionscontracts.Severalexchangetradedfundsseektotrackitsperformance.The
formulausesakernelsmoothedestimatorthattakesasinputsthecurrentmarketpricesforalloutofthemoney
callsandputsforthefrontmonthandsecondmonthexpirations.[5]Thegoalistoestimatetheimpliedvolatility
oftheS&P500indexoverthenext30days.
TheVIXiscalculatedasthe squarerootoftheparvarianceswapratefora30dayterm initiatedtoday.Note
thattheVIXisthevolatilityofavarianceswapandnotthatofavolatilityswap(volatilitybeingthesquareroot
ofvariance,orstandarddeviation).Avarianceswapcanbeperfectlystaticallyreplicatedthroughvanillaputs
andcallswhereasavolatilityswaprequiresdynamichedging.TheVIXisthesquarerootoftheriskneutral
expectationoftheS&P500varianceoverthenext30calendardays.TheVIXisquotedasanannualized
standarddeviation.
TheVIXhasreplacedtheolderVXOasthepreferredvolatilityindexusedbythemedia.VXOwasameasure
ofimpliedvolatilitycalculatedusing30dayS&P100indexatthemoneyoptions.
StatisticianSalilMehtaofStatisticalIdeasshowsthedistributionoftheVIX.[6]

Interpretation
TheVIXisquotedinpercentagepointsandrepresentstheexpectedrangeofmovementintheS&P500index
overthenextyear,ata68%confidencelevel(i.e.onestandarddeviationofthenormalprobabilitycurve).For
example,iftheVIXis15,thisrepresentsanexpectedannualizedchange,witha68%probability,oflessthan
15%upordown.Onecancalculatetheexpectedvolatilityrangeforasinglemonthfromthisfigurebydividing
theVIXfigureof15notby12,butby12whichwouldimplyarangeof+/4.33%overthenext30day
period.[7]Similarly,expectedvolatilityforaweekwouldbe15dividedby52,or+/2.08%.
Thepriceofcallandputoptionscanbeusedtocalculateimpliedvolatility,becausevolatilityisoneofthe
factorsusedtocalculatethevalueoftheseoptions.Higher(orlower)volatilityoftheunderlyingsecuritymakes
anoptionmore(orless)valuable,becausethereisagreater(orsmaller)probabilitythattheoptionwillexpire
inthemoney(i.e.,withamarketvalueabovezero).Thus,ahigheroptionpriceimpliesgreatervolatility,other
thingsbeingequal.
EventhoughtheVIXisquotedasapercentageratherthanadollaramountthereareanumberofVIXbased
derivativeinstrumentsinexistence,including:
VIXfuturescontracts,whichbegantradingin2004
exchangelistedVIXoptions,whichbegantradinginFebruary2006.
VIXfuturesbasedexchangetradednotesandexchangetradedfunds,suchas:
S&P500VIXShortTermFuturesETN(NYSE:VXX
(https://www.nyse.com/quote/XNYS:VXX))andS&P500VIXMidTermFuturesETN
(NYSE:VXZ(https://www.nyse.com/quote/XNYS:VXZ))launchedbyBarclaysiPathinFebruary
2009.
S&P500VIXETF(LSE:VIXS(http://www.londonstockexchange.com/exchange/searchengine/se
arch.html?q=VIXS))launchedbySourceUKServicesinJune2010.
VIXShortTermFuturesETF(NYSE:VIXY(https://www.nyse.com/quote/XNYS:VIXY))and
VIXMidTermFuturesETF(NYSE:VIXM(https://www.nyse.com/quote/XNYS:VIXM))
launchedbyProSharesinJanuary2011.
SimilarindicesforbondsincludetheMOVE,LBPXindices.

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AlthoughtheVIXisoftencalledthe"fearindex",ahighVIXisnotnecessarilybearishforstocks.[8]Instead,
theVIXisameasureofmarketperceivedvolatilityineitherdirection,includingtotheupside.Inpractical
terms,wheninvestorsanticipatelargeupsidevolatility,theyareunwillingtosellupsidecallstockoptions
unlesstheyreceivealargepremium.Optionbuyerswillbewillingtopaysuchhighpremiumsonlyifsimilarly
anticipatingalargeupsidemove.Theresultingaggregateofincreasesinupsidestockoptioncallpricesraises
theVIXjustasdoestheaggregategrowthindownsidestockputoptionpremiumsthatoccurswhenoption
buyersandsellersanticipatealikelysharpmovetothedownside.Whenthemarketisbelievedaslikelytosoar
astoplummet,writinganyoptionthatwillcostthewriterintheeventofasuddenlargemoveineither
directionmaylookequallyrisky.
HencehighVIXreadingsmeaninvestorsseesignificantriskthatthemarketwillmovesharply,whether
downwardorupward.ThehighestVIXreadingsoccurwheninvestorsanticipatethathugemovesineither
directionarelikely.Onlywheninvestorsperceiveneithersignificantdownsiderisknorsignificantupside
potentialwilltheVIXbelow.
TheBlackScholesformulausesamodelofstockpricedynamicstoestimatehowanoptionsvaluedependson
thevolatilityoftheunderlyingassets.

LimitationandGVIX
Chow,JiangandLi(2014)(http://pa
pers.ssrn.com/sol3/Papers.cfm?abstr
act_id=2489345)[9]demonstrated
thatwithoutimposinganystructure
ontheunderlyingforcingprocess,
themodelfreeCBOEvolatility
index(VIX)doesnotmeasure
marketexpectationofvolatilitybut
thatofalinearmoment
combination.Particularly,VIX
undervalues(overvalues)volatility
whenmarketreturnisexpectedto
VIXDownwardBias.(left)ThisfigureplotstheVIXdownwardbias,
benegatively(positively)skewed.
measuredbydaily(VIXGVIX)fromJan2005May2014,corresponding
Alternatively,theydevelopamodel
todifferentlevelsofVIXvalues.IthasbeenwidelyviewedthatVIXvalues
freegeneralizedvolatilityindex
greaterthan30aregenerallyassociatedwithalargeamountofvolatilityasa
(GVIX).Withnodiffusion
resultofinvestorfear,whilevaluesbelow20generallycorrespondtoless
assumption,GVIXisformulated
stressfultimesinthemarkets.
directlyfromthedefinitionoflog
returnvariance,andVIXisaspecial
caseoftheGVIX.Empirically,VIXgenerallyunderstatesthetruevolatility,andtheestimationerrors
considerablyenlargeduringvolatilemarkets.Inaddition,thespreadbetweenGVIXandVIX(GVSpread)
followsameanrevertingprocess.

Criticisms
VIXissometimescriticizedintermsofitbeingapredictionoffuturevolatility.Itisameasureofthecurrent
priceofindexoptions.
Despitetheirsophisticatedcomposition,criticsclaimthepredictivepowerofmostvolatilityforecastingmodels
issimilartothatofplainvanillameasures,suchassimplepastvolatility.[10][11]However,otherworkshave
counteredthatthesecritiquesfailedtocorrectlyimplementthemorecomplicatedmodels.[12]

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Somepractitionersandportfolio
managersseemtocompletelyignore
ordismissvolatilityforecasting
models.Forexample,NassimTaleb
famouslytitledoneofhisJournalof
PortfolioManagementpapersWe
Don'tQuiteKnowWhatWeare
TalkingAboutWhenWeTalkAbout
Volatility.[13]
Inasimilarnote,EmanuelDerman
expressedhisdisillusionwiththe
PerformanceofVIX(left)comparedtopastvolatility(right)as30day
enormoussupplyofempirical
volatilitypredictors,fortheperiodofJan1990Sep2009.Volatilityis
modelsunsupportedbytheory.[14]
measuredasthestandarddeviationofS&P500onedayreturnsoveramonth's
Hearguesthat,while"theoriesare
period.Thebluelinesindicatelinearregressions,resultinginthecorrelation
attemptstouncoverthehidden
coefficientsrshown.NotethatVIXhasvirtuallythesamepredictivepoweras
principlesunderpinningtheworld
pastvolatility,insofarastheshowncorrelationcoefficientsarenearly
aroundus,asAlbertEinsteindid
identical.
withhistheoryofrelativity",we
shouldrememberthat"modelsare
metaphorsanalogiesthatdescribeonethingrelativetoanother".
MichaelHarrishasarguedthatVIXjusttrackstheinverseofpriceandithasnopredictivepowerasa
result.[15][16]
VIXshouldhavepredictivepoweraslongasthepricescomputedbytheBlackScholesequationarebest
guessassumptionsaboutthevolatilitypredictedforthefutureleadtime,theremainingtimetomaturity.
RobertJ.Shillerdoesn'tseenolongertheVIXasaprooffortheBSformulasinceitwascircularreasoning.
Hedidn'trepeatthisstatementinhis2011lessonaboutOptionsMarkets:[17]

History
HereisatimelineofsomekeyeventsinthehistoryoftheVIXIndex:
1987TheSigmaIndexwasintroducedinanacademicpaperbyProfessorMenachemBrennerand
ProfessorDanGalai,publishedinFinancialAnalystsJournal,July/August1989(http://people.stern.nyu.e
du/mbrenner/research/FAJ_articleon_Volatility_Der.pdf).BrennerandGalaiwrote,"Ourvolatilityindex,
tobenamedSigmaIndex,wouldbeupdatedfrequentlyandusedastheunderlyingassetforfuturesand
options...Avolatilityindexwouldplaythesameroleasthemarketindexplayforoptionsandfutureson
theindex."
1992TheAmericanStockExchangeannounceditisconductingafeasibilitystudyonavolatilityindex,
proposedasthe"SigmaIndex.""SIwouldbeanunderlyingassetforfuturesandoptionsthatinvestors
wouldusetohedgeagainsttheriskofvolatilitychangesinthestockmarket.(http://people.stern.nyu.edu/
mbrenner/research/IFR_report_on_BrennerGalai_Sigma_Index.pdf)"
1993OnJanuary19,1993,theChicagoBoardOptionsExchangeheldapressconferencetoannounce
thelaunchofrealtimereportingoftheCBOEMarketVolatilityIndexorVIX.Theoriginalformulafor
VIXwasdevelopedfortheCBOEbyProf.RobertWhaleyandwasbasedonCBOES&P100Index
(OEX)optionprices.(http://rewconsulting.files.wordpress.com/2012/09/jd93.pdf)
2003TheCBOEintroducedamoredetailedmethodology(http://www.cboe.com/micro/vix/vixwhite.pd
f)fortheVIX.WorkingwithGoldmanSachs,theCBOEdevelopedfurthercomputational
methodologies,andchangedtheunderlyingindextheCBOES&P100Index(OEX)totheCBOES&P
500Index(SPX).
2004OnMarch26,2004,thefirstevertradinginfuturesontheVIXIndexbeganontheCBOEFutures
Exchange(CFE)(http://cfe.cboe.com/Products/).NowadaystheVIXisproposedondifferenttrading
platforms,likeXTB(http://www.xtb.fr/).
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2006VIXoptions(http://www.cboe.com/micro/vix/vixoptions.aspx)werelaunchedinFebruary2006.
2008OnOctober24,2008,theVIXreachedanintradayhighof89.53.
Between1990andOctober2008,theaveragevalueofVIXwas19.04.
In2004and2006,VIXFuturesandVIXOptions,respectively,werenamedMostInnovativeIndexProductat
theSuperBowlofIndexingConference.[18]

Seealso
HindenburgOmen
Markettrend
IVX,volatilityindex
S&P/ASX200VIX,volatilityindex
Greedandfear

Bibliography
Brenner,Menachem,andGalai,Dan."NewFinancialInstrumentsforHedgingChangesinVolatility(htt
p://people.stern.nyu.edu/mbrenner/research/FAJ_articleon_Volatility_Der.pdf),"FinancialAnalysts
Journal,July/August1989.
Brenner,Menachem,andGalai,Dan."HedgingVolatilityinForeignCurrencies(http://people.stern.nyu.e
du/mbrenner/research/JOD_article_of_Vol_Index_Computation.pdf),"TheJournalofDerivatives,Fall,
1993.
"AmexExploresVolatilityOptions,"InternationalFinancingReview(http://people.stern.nyu.edu/mbrenn
er/research/IFR_report_on_BrennerGalai_Sigma_Index.pdf),August8,1992.
Black,KeithH."ImprovingHedgeFundRiskExposuresbyHedgingEquityMarketVolatility,orHow
theVIXAteMyKurtosis."TheJournalofTrading.(Spring2006).
Connors,Larry."AVolatileIdea."Futures(July1999):p.3637.
Connors,Larry."TimingYourS&PTradeswiththeVIX."Futures(June2002):pp.4647.
Copeland,Maggie."MarketTiming:StyleandSizeRotationUsingtheVIX."FinancialAnalystsJournal,
(Mar/Apr1999)pp.7382.
Daigler,RobertT.,andLauraRossi."APortfolioofStocksandVolatility."TheJournalofInvesting.
(Summer2006).
Fleming,Jeff,BarbaraOstdiek,andRobertE.Whaley,"PredictingStockMarketVolatility:ANew
Measure,"TheJournalofFuturesMarkets15(May1995),pp.265302.
Hulbert,Mark,"TheMisuseoftheStockMarket'sFearIndex,"(http://online.barrons.com/article/SB5000
1424052748703464104576616983309689062.html)Barron's,October7,2011.
Moran,MatthewT.,"ReviewoftheVIXIndexandVIXFutures.,"JournalofIndexes,
(October/November2004).pp.1619.
Moran,MatthewT.andSrikantDash."VIXFuturesandOptions:PricingandUsingVolatilityProducts
toManageDownsideRiskandImproveEfficiencyinEquityPortfolios."TheJournalofTrading.
(Summer2007).
Szado,Ed."VIXFuturesandOptionsACaseStudyofPortfolioDiversificationDuringthe2008
FinancialCrisis."(June2009).
Tan,Kopin."TheABCsofVIX."Barron's(Mar15,2004):p.MW16.
Tracy,Tennille."TradingSoarsonFinancialsAsVolatilityIndexHitsRecord."WallStreetJournal.
(Sept.30,2008)pg.C6.
Whaley,RobertE.,"DerivativesonMarketVolatility:HedgingToolsLongOverdue,"TheJournalof
Derivatives1(Fall1993),pp.7184.
Whaley,RobertE.,"TheInvestorFearGauge,"TheJournalofPortfolioManagement26(Spring2000),
pp.1217.
Whaley,RobertE.,"UnderstandingtheVIX."TheJournalofPortfolioManagement35(Spring2009),
pp.98105.

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References
1.Brenner,Menachem,FandGalai,Dan."NewFinancialInstrumentsforHedgingChangesinVolatility,"Financial
AnalystsJournal,July/August1989.http://people.stern.nyu.edu/mbrenner/research/FAJ_articleon_Volatility_Der.pdf
2.Brenner,Menachem,andGalai,Dan."HedgingVolatilityinForeignCurrencies,"TheJournalofDerivatives,Fall,
1993.http://people.stern.nyu.edu/mbrenner/research/JOD_article_of_Vol_Index_Computation.pdf
3.RobertE.Whaley,1993,"Derivativesonmarketvolatility:Hedgingtoolslongoverdue,"JournalofDerivatives1
(Fall),7184.http://rewconsulting.files.wordpress.com/2012/09/jd93.pdf
4.IntroductiontoVIXOptionsandFutures(http://www.cboe.com/micro/VIX/vixintro.aspx)
5."VIXWhitePaper"(PDF).Retrieved20100920.
6.http://statisticalideas.blogspot.com/2015/07/volatilityinmotion.html
7.Notethatthedivisorforasinglemonthis12,andnot12.Seethedefinitionvolatilityforadiscussionofcomputing
interperiodvolatility.
8.http://www.wallstreetdaily.com/2011/08/10/pictureperfecttradethismarket/
9."DoesVIXTrulyMeasureReturnVolatility?".Retrieved20141124.
10.Cumby,R.Figlewski,S.Hasbrouck,J.(1993)."ForecastingVolatilityandCorrelationswithEGARCHmodels".
JournalofDerivatives.1(2):5163.doi:10.3905/jod.1993.407877.
11.Jorion,P.(1995)."PredictingVolatilityinForeignExchangeMarket".JournalofFinance.50(2):507528.
doi:10.1111/j.15406261.1995.tb04793.x.JSTOR2329417.
12.Andersen,TorbenG.Bollerslev,Tim(1998)."AnsweringtheSkeptics:Yes,StandardVolatilityModelsDoProvide
AccurateForecasts".InternationalEconomicReview.39(4):885905.JSTOR2527343.
13.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=970480WeDon'tQuiteKnowWhatWeareTalkingAboutWhen
WeTalkAboutVolatility
14.Derman,Emanuel(2011):Models.Behaving.Badly:WhyConfusingIllusionWithRealityCanLeadtoDisaster,on
WallStreetandinLife,Ed.FreePress.
15.http://www.priceactionlab.com/Blog/2012/08/onthezeropredictivecapacityofvix/
16.http://www.priceactionlab.com/Blog/2012/08/furtheranalyticalevidencethatvixjusttrackstheinverseofprice/
17.http://oyc.yale.edu/transcript/1086/econ25211
18."IndexProductAwards".Retrieved20080105.

Externallinks
BloombergpageforVIX:IND(http://www.bloomberg.com/apps/quote?ticker=VIX:IND)
Yahoo!Financepagefor^VIX(http://finance.yahoo.com/q?s=^VIX)
Retrievedfrom"https://en.wikipedia.org/w/index.php?title=VIX&oldid=740474941"
Categories: Americanstockmarketindices Derivatives(finance) Mathematicalfinance
Technicalanalysis
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