VIX
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.
The VIX traces its origin to the financial economics research of Menachem Brenner and Dan Galai.
"[3] In 1992, the CBOE hired consultant Bob Whaley to calculate values for stock market volatility based on this theoretical work.
[6][7] Unlike other market products, VIX cannot be bought or sold directly.
[10] The concept of computing implied volatility or an implied volatility index dates 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.
[11] 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.
[6][page needed] The goal is to estimate the implied volatility of S&P 500 index options at an average expiration of 30 days.
[15] Given that it is possible to create a hedging position equivalent to a variance swap using only vanilla puts and calls (also called "static replication"),[16] the VIX can also be seen as the square root of the implied volatility of a variance swap[17] – and not that of a volatility swap, volatility being the square root of variance, or standard deviation.
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.
[18] The VIX is calculated and disseminated in real-time by the Chicago Board Options Exchange.
It is calculated as a weighted average of out-of-the-money call and put options on the S&P 500:
][citation needed] 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.
[35][36][37] However, other works have countered that these critiques failed to correctly implement the more complicated models.
[38] Some practitioners and portfolio managers have questioned the depth of our understanding of the fundamental concept of volatility, itself.
[39] Relatedly,[verification needed] Emanuel Derman has expressed disillusion with empirical models that are unsupported by theory.
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).
[citation needed] 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.
The VVIX measures how much the VIX changes and hence can be thought of as the acceleration of investor fear.
