VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market's expectation of volatility based on S&P 500 index options. It is calculated and disseminated on a real-time basis by the CBOE, and is often referred to as the fear index or fear gauge.
The VIX traces its origin to the financial
economics research of Menachem Brenner and Dan Galai. In a series of papers
beginning in 1989, Brenner and Galai proposed 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 their papers, Brenner and Galai
proposed, "[the] volatility index, to be named 'Sigma Index', would be
updated frequently and used as the underlying asset for futures and options.
... A volatility index would play the same role as the market index play for
options and futures on the index." In
1992, the CBOE hired consultant Bob Whaley to calculate values for stock market
volatility based on this theoretical work.
Whaley utilized data series in the index options market, and provided
the CBOE with computations for daily VIX levels from January 1986 to May 1992.
The resulting VIX index formulation
provides a measure of market volatility on which expectations of further stock
market volatility in the near future might be based. The current VIX index
value quotes the expected annualized change in the S&P 500 index over the
following 30 days, as computed from options-based theory and current options-market
data.
To summarize, VIX is a volatility index
derived from S&P 500 options for the 30 days following the measurement
date, with the price of each option representing the market's expectation of
30-day forward-looking volatility. The
resulting VIX index formulation provides a measure of expected market
volatility on which expectations of further stock market volatility in the near
future might be based.
Like conventional indexes, the VIX Index
calculation employs rules for selecting component options and a formula to
calculate index values. Unlike other
market products, VIX cannot be bought or sold directly. Instead, VIX is traded and exchanged via derivative contract, derived ETFs, and ETNs which most
commonly track VIX futures indexes.
In addition to VIX, CBOE uses the same
methodology to compute the following related products:
- Cboe
ShortTerm Volatility Index (VIX9DSM), which reflects 9-day expected
volatility of the S&P 500 Index,
- Cboe
S&P 500® 3-Month Volatility Index (VIX3MSM),
- Cboe
S&P 500® 6-Month Volatility Index (VIX6MSM)
- Cboe
S&P 500 1-Year Volatility Index (VIX1YSM).
Cboe also calculates the Nasdaq-100®
Volatility Index (VXNSM), Cboe DJIA® Volatility Index (VXDSM) and the Cboe
Russell 2000® Volatility Index (RVXSM).[5] There
is even a VIX on VIX (VVIX) which is a volatility of volatility measure in that
it represents the expected volatility of the 30-day forward price of the CBOE
Volatility Index (the VIX®).
The concept of computing implied
volatility or an implied volatility index dates back to the publication of the
Black and Scholes' 1973 paper, "The Pricing of Options and Corporate
Liabilities," published in the Journal of Political Economy, which
introduced the seminal Black–Scholes model for valuing options. Just as a bond's implied yield to maturity
can be computed by equating a bond's market price to its valuation formula, an
option-implied volatility of a financial or physical asset can be computed by
equating the asset option's market price to its valuation formula. In the case of VIX, the option prices used
are the S&P 500 index option prices.
The VIX takes as inputs the market
prices of the call and put options on the S&P 500 index for near-term
options with more than 23 days until expiration, next-term options with less
than 37 days until expiration, and risk-free U.S. treasury bill interest rates.
Options are ignored if their bid prices are zero or where their strike prices
are outside the level where two consecutive bid prices are zero. The goal is to estimate the implied
volatility of S&P 500 index options at an average expiration of 30 days.
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 the square root of the risk-neutral expectation of the
S&P 500 variance over the next 30 calendar days and is quoted as an
annualized standard deviation.
The VIX is calculated and disseminated
in real-time by the Chicago Board Options Exchange. On March 26, 2004, trading in futures on the
VIX began on CBOE Futures Exchange (CFE).
On February 24, 2006, it became possible
to trade options on the VIX. Several exchange-traded
funds hold mixtures of VIX futures that attempt to enable stock-like trading in
those futures. The
correlation between these ETFs and the actual VIX index is very poor,
especially when the VIX is moving.
History of the VIX Index
The following is a timeline of key
events in the history of the VIX Index:
- 1987
- The Sigma Index was introduced in an academic paper by Brenner and
Galai, published in Financial Analysts Journal, July/August 1989. Brenner
and Galai wrote, "Our volatility index, to be named Sigma Index,
would be updated frequently and used as the underlying asset for futures
and options... A volatility index would play the same role as the market
index play for options and futures on the index."
- 1989
- Brenner and Galai's paper is published in Financial Analysts Journal. Brenner and Galai develop their research
further in graduate symposia at The Hebrew University of Jerusalem and at
the Leonard M. Stern School of Business at New York University.
- 1992
- The American Stock Exchange announced it is conducting a feasibility
study on a volatility index, proposed as the "Sigma Index."
- 1993
- On January 19, 1993, the Chicago Board Options Exchange held a press
conference to announce the launch of real-time reporting of the CBOE
Market Volatility Index or VIX. The formula that determines the VIX is
tailored to the CBOE S&P 100 Index (OEX) option prices, and was
developed by Professor Robert E. Whaley of Duke University (now at
Vanderbilt University), whom the CBOE had commissioned. This index, now known as the VXO, is a
measure of implied volatility calculated using 30-day S&P 100 index
at-the-money options.
- 1993
- Professors Brenner and Galai develop their 1989 proposal for a series of
volatility index in their paper, "Hedging Volatility in Foreign
Currencies," published in The Journal of Derivatives in the fall of
1993.
- 2003
- The CBOE introduces a new methodology for the VIX. Working with Goldman
Sachs, the CBOE developed further computational methodologies, and changed
the underlying index the CBOE S&P 100 Index (OEX) to the CBOE S&P
500 Index (SPX). The old methodology was renamed the VXO.
- 2004
- On March 26, 2004, the first-ever trading in futures on the VIX Index
began on the CBOE Futures Exchange (CFE).
VIX is now proposed on different trading platforms, like XTB.
- 2006
- VIX options were launched in February of this year.
- 2008
- On October 24, 2008, the VIX reached an intraday high of 89.53.
- 2008
- On November 21, 2008, the VIX closed at a record 80.74.
- 2018
- On February 5, 2018, the VIX closed 37.32 (up 103.99% from previous
close).
- 2020
- On March 9, 2020, the VIX hit 62.12, the highest level since the 2008
financial crisis due to a combination of the 2020 Russia–Saudi Arabia oil
price war and the COVID-19 pandemic.
- 2020
- During the COVID-19 pandemic, on March 12, 2020, the VIX hit and closed
at 75.47, exceeding the previous Black Monday value, as a travel ban to
the US from Europe was announced by President Trump.
- 2020
- On March 16, the VIX closed at 82.69, the highest level since its
inception in 1990.
Criticism of the Vix
VIX is sometimes criticized as a prediction of future volatility.
Instead it is described as a measure of the current price of index options.
Critics claim that, despite a
sophisticated formulation, the predictive power of most volatility forecasting
models is similar to that of plain-vanilla measures, such as simple past
volatility. However, other works have
countered that these critiques failed to correctly implement the more
complicated models.
Some practitioners and portfolio
managers have questioned the depth of our understanding of the fundamental
concept of volatility, itself. For
example, Daniel
Goldstein and Nassim Taleb famously
titled one of their research articles, We Don't Quite Know What We are
Talking About When We Talk About Volatility.
Relatedly, Emanuel Derman has expressed disillusion with
empirical models that are unsupported by theory. He argues that, while "theories are
attempts to uncover the hidden principles underpinning the world around us...
[we should remember that] models are metaphors—analogies that describe one
thing relative to another."
Michael Harris, the trader, programmer,
price pattern theorist, and author, has argued that VIX just tracks the inverse
of price and has no predictive power.
According to some, 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). Robert J.
Shiller has argued that it would be circular reasoning to consider VIX to be
proof of Black-Scholes, because they both express the same implied volatility,
and has found that calculating VIX retrospectively in 1929 did not predict the
surpassing volatility of the Great Depression—suggesting that in the case of
anomalous conditions, VIX cannot even weakly predict future severe events.
An academic study from the University of
Texas at Austin and Ohio State University examined potential methods of VIX
manipulation. On February 12, 2018, a
letter was sent to the Commodity Futures Trading Commission and Securities and
Exchange Commission by a law firm representing an anonymous whistleblower
alleging manipulation of the VIX.
No comments:
Post a Comment