Monday, March 12, 2012

Fear Has Vanished from the Market

The CBOE Volatility Index (VIX) closed today at 15.64, a drop of 8.6% from yesterday's close at 17.11, and the lowest closing value since May 31 of last year.  It's also at close to the lowest level at any time during the last four years (see chart).  

See WSJ article "Fear Has Vanished from the Stock Market."  


At 3/12/2012 5:31 PM, Blogger Jon Murphy said...

I wonder if this isn't a reflection of fear so much as it is the market's realization that the recovery is underway, but it will be slow

At 3/12/2012 5:38 PM, Blogger Buddy R Pacifico said...

How well does the VIX predict volitility in the market for the next thirty days?

Here is a chart that shows the VIX predicts "pretty well", as presented by Crossing Wall Street.

At 3/12/2012 5:38 PM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

At 3/12/2012 7:02 PM, Blogger Rufus II said...

If that doesn't scare you to death nothing will.

At 3/12/2012 7:29 PM, Blogger jorod said...

People have learned to hedge with gold.

At 3/13/2012 11:13 AM, Blogger morganovich said...


the vix has absolutely no value as an economic indicator.

it's just the implied volatility on options.

in an environment with liquidity this high, it's just responding to a flood of money and the fact that the market has been a frozen rope going up.

it has no forward predictive vlaue at low levels. it can stay there for very long periods and is always very, very low at market tops, which, fortuitously, means that options hedging is always cheep at tops.

the only time the vix has any predictive power at all is at high values.

the vix went from 19 to 70 in a month during 2008.

over 50, you are seeing severe fear.

but even then, the vix is a bad indicator as it peaked maybe 5 months before the market bottomed and was already dropping during some of the worst carnage.

someone, somewhere decided it was a "fear gauge" and the media loves it as such, but that is NOT what the index is for.

it's intended as a specialized tool to benchmark options volatility so you can see if GE puts are trading rich or cheap relative the the overall market in addition to looking at GE's own trailing X day volatility and give you a sense of how premiums are priced and changing in the CBOE options contracts.

it is easily the most misused indicator in asset markets. pretty much any time you hear the media use it, they have no idea what they are talking about.

the vix was not intended to, nor does it have any forward predictive value nor does it even tell you where you are now.

any such ability it does have (and i am unconvinced it can be used meaningfully) it negative. low vix means a market to fear, high is a tape to buy, but again, i think it's damn near useless that way as well.

it's a lagging indicator to be used as a pricing comparison tool for options, no more, no less.


that chart is worthless. whoever made it needs a lesson in statistics. the whole point of a standard deviation is you spend almost all your time within it. the vix tends to lie quiescent for long periods and only respond to negative moves (because people buy puts from desperation, but rarely calls and most big funds cannot hedge by shorting so they have to buy puts, but buy fewer calls as they can just own stock)

look at the standard deviation they are using. +/- 5%?!?

a 10% MONTHLY range on the s=p and they are surprised it's almost always inside that?

that's like using 80 as the over under for football games and being surprised the under almost always wins.


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