Tuesday, October 14, 2008

Yesterday’s VIX Drop Is Fifth Largest Ever in Percentage Terms

Yesterday the VIX registered its largest one day point drop in history, falling 14.96 points, but what does that mean?

If history is any guide, the drop in the VIX may not be particularly meaningful. The previous largest drop in the VIX in absolute numbers dates back to September 1, 1998. On that day, there was a brief lull in the Long-Term Capital Management crisis and the VIX pulled back from 44.28 to 36.48. Just three days later, however, the VIX was back above 44.

In percentage terms, yesterday’s 21.4% drop in the VIX is the fifth largest one day drop in the VIX in 19 years.

I wrote about previous instances of 20% drops in the VIX a little over a year ago in On the Rarity of a 20% One Day Drop in the VIX. Since that post, the VIX dropped 22.5% on 11/13/07 and exactly 20% on 3/18/08.

In the six previous instances in which the VIX has dropped at least 20%, the SPX has generally underperformed the historical averages slightly going forward.

Maybe someday I should publish the Guinness Book of Volatility Records…

4 comments:

Anonymous said...

I understand that the VIX is calculated based on the SPX option volatilities on the two nearest months, but that 8 days before expiration of the near month, the VIX calculation switches to the second and third nearest months. Yesterday was 8 days before October expiration, so the VIX switched to the volalities of November and December options. Since the November and December volatilities are much lower than the October volatilities, could the switch have contributed to the Vix's sharp drop yesterday?

Bill Luby said...

Hi Anon,

That is an excellent question.

First, you are correct about the details of the months used for the VIX calculation and the timing of the transition.

In theory, the blending of 1st and 2nd month as well as the transition to 2nd and 3rd month on the 8th day prior to expiration could cause a change in the VIX, but I do not think that had much of an impact on the VIX drop yesterday.

Regarding yesterday, this was the 5th largest VIX % drop since 1990...but for the SPX, not only was this the largest % gain since 1990, but the 11.58% gain was more than double the 5.73% previous best (post-1990) from 7/24/02. Yesterday the VIX move only about half the distance that history would have predicted, so I do not think the rolling month aspect of the calculation had much of an impact. If it did, it was a drop in yesterday's ocean of change.

FWIW, I have an analysis of the VIX rolling day (expiration -8) values in my R&D backlog. If anyone else has done an analysis of this, feel free to chime in.

Finally, the CBOE recently lanuched two new VIX indices that I do not believe they have published information about yet. These are the Near-term VIX Index and the Far-term VIX Index and represent the two months used in the VIX calculations. As these numbers are now reported independently, it should be easier to evaluate the rolling phenomenon and VIX change impact going forward.

Cheers,

-Bill

daveM said...

I look forward to your work with the two new Vix instruments...

I quite appreciate your blog


daveM

PAT said...

Hi Bill,

I was roaming the Web when I discovered your blog. I appreciate your posts as they are relevant so I send you all my interest from France. Please don't stop, I will come back here regularily (as a silent visitor) so you know you're not writing for nothing ;-)(it can be a reason why people stop writing)

Best Regards,
Thomas

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