Business

A measure of volatility via prism of markets

Economic pandemic and coronavirus economy or virus Outbreak and Stock market fear as a bull and bear crisis and sick financial health as a business recession concept with 3D illustration elements.

Economic pandemic and coronavirus economy or virus Outbreak and Stock market fear as a bull and bear crisis and sick financial health as a business recession concept with 3D illustration elements.  

VIX helps predict the overall market volatility expectations over the next 30 days

What is India VIX?

India VIX is an index that serves as a measure of market expectation of volatility in the near term. Simply put, while volatility signifies the rate and magnitude of change in the stock price or index value, the movement in the VIX index reflects the overall market volatility expectations over the next 30 days. So, a spike in the VIX value means the market is expecting higher volatility in the near future.

Why do we have a VIX index?

India VIX index is not the first of its kind in the world.

The VIX index was first created by the Chicago Board Options Exchange (CBOE) and introduced in 1993 based on the prices of S&P 500 index.

Since then, it has become a globally-recognised gauge of volatility in the U.S equity markets. The India VIX was launched with a similar intent in 2010 and is based on the computation methodology of CBOE though amended to align with the Indian markets.

While derivatives contracts were also launched on India VIX, those never really registered any significant volume.

Incidentally, the VIX value is among the important parameters that are taken into account for pricing of options contracts, which are one of the most popular derivative instruments.

How is VIX index behaving currently?

In the current calendar year, the India VIX index has jumped fivefold, from around 12 levels to the current 67 levels, which clearly hints that the market perceives that volatility will only increase in the coming days.

Incidentally, the index is currently trading at record highs and on some days in the recent past, saw a surge of more than 20% in a single day.

The trend has been similar in CBOE VIX as well, having surged from below 15 levels in February to the current 67. It touched a high of 82 on March 16. Interestingly, given the nature of the index, it is also known as ‘fear gauge’ or ‘fear index’.

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Printable version | Jul 9, 2020 3:37:36 AM | https://www.thehindu.com/business/a-measure-of-volatility-via-prism-of-markets/article31194722.ece

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