Monday, March 12, 2007

The VDAX and the VIX in the Wake of 2/27

When I introduced the VDAX in this space back on 2/22, volatility was hibernating with the bears on each and every continent and my commentary focused on the high degree of correlation between the VIX and the VDAX. I noted that the two indices often trade in tandem, but pointed out that the VDAX sometimes lags the VIX by one trading day or even two.

With the surge in volatility on the heels of 2/27, this seems like a good time to revisit some of those ideas.

Looking at the data for the four months leading up to 2/27, the difference between the VDAX (VDAX-NEW) and the VIX as a percentage of the VDAX ranged between 17% and 36%, with a mean of about 26% (plotted below as a dashed gray line.)

On February 27, the German markets closed well before the US markets; by the time the VIX had closed for the day, it was trading 5% higher than the VDAX. Over the next week or so, you can see where the VIX and VDAX played lead-lag cat and mouse, as global players tried to place bets ahead of any signs of increasing or lessening international contagion. Only in the last several days, has the VDAX-VIX spread ratio settled into a relatively narrow trading range, which I would interpret as a sign that the major players in the volatility markets believe that the probability of increased volatility or contagion is starting to subside. Whether these traders can accurately help predict the future remains to be seen, but when they stop playing the intermarket volatility game, you should at least incorporate that information into your market outlook.

0 comments:

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2013 Bill Luby. All rights reserved.
 
Web Analytics