Archive for October, 2011

Even the Volatility Index Is Volatile

Tuesday, October 11th, 2011

You know volatility is out of control when the index that measures volatility is itself setting new records for volatility.

In the second week of August, U.S. equity markets witnessed four consecutive days of 400-point swings, the first time that has happened in the stock exchange’s 115 year history.

Given that volatility, it’s no surprise that the Chicago Board Options Exchange Volatility Index (VIX) had its largest quarterly increase ever in the third quarter of 2011.  The VIX has held above 30% for the past several months, its longest period above that level since the five-month period of October 2008 to March 2009.

The VIX is a predictor of expected market volatility for the 30 days to come.  Anytime the VIX exceeds 30%, you can expect the market to be volatile for a month afterward.

The VIX is not nearly as high as it was in October 2008, when it spiked up over 80%, but it’s even more volatile than it was three years ago.

On four days in October 2008 (eight between August and December 2008), the VIX registered one-day swings exceeding 6.5%, which had previously happened only twice since its inception in 1990.  In fact, the VIX swings exceeded 20% on several days in 2008.

In August of this year, though, the VIX with one-day swings of 50%, 35.4% and 35.1%.  And the volatility is expected to continue.