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In the Market - July 2008
Jul 15, 2008
S&P 500 Selloffs vs. VIX
Calm during the Storm
Where's the VIX? In the last year, the S&P 500 has lost over 100 points five times. The first four times it happened we saw what we'd expect to see: the so-called fear index, the Chicago Board of Options Exchange volatility index, or VIX, spiked to above 30. Now, well into our fifth downturn, with the stock market down over 200 points, the VIX has had a surprisingly muted response.
What's this mean? For one thing, it raises the concern that investors are not buying protection during this recent market turbulence as they have in the earlier down trends. By comparison, the last time we entered bear market territory, the VIX shot up to over 40. The lack of a VIX spike here raises some serious concerns. When investors are not fearful of further declines, any increase in volatility due to market losses will be magnified by the lack of protection purchased. Complacency is the emotion that should scare risk mangers the most because the biggest risks are those that no one is prepared for. As the markets continue to fall we should see the VIX rise up to historically normal levels, but we should not expect a rebound until investors have loaded up on protection, driving implied volatility higher. 30% might not be a magic number, but it would certainly give bottom fishers more conviction. For questions or comments andy.deutsch@riskmetrics.com.
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