Tuesday, November 4, 2008

The VIX and Lagging Historical Volatility

By definition, historical volatility will always be backward looking and lag the real-time volatility environment. When volatility trends, as it has over the course of the past two months, this phenomenon is less evident. In the current market environment, however, where both stocks and implied volatility measures such as the VIX are reversing, many measures of historical volatility begin to seem no more useful than driving on a winding road using the rear view mirror.

The graph below shows that while the 30 day historical volatility in the SPX peaked a week ago, it has only fallen 4% since that time. Not surprisingly, the 50 day historical volatility measure has been even less responsive to recent market changes and has entered a plateau phase, seemingly oblivious to the recent changes in volatility. By contrast, the 10 day historical volatility measure has dropped 27%; it has more accurately mirrored the VIX and perhaps even hinted at a coming VIX reversal when it topped three days before the VIX did.

Ten day historical volatility is erratic and prone to readings that reflect a low signal to noise ratio. When volatility is changing quickly, however, 10 day historical volatility is frequently a better proxy for the VIX and a more meaningful baseline for comparison than its 30 day sibling.

[source: VIX and More]

7 comments:

Anonymous said...

This is a very interesting posting, especially since the VIX cash index decreased from a closing level of 80.06 on October twenty-seventh to a level of below 45 thus far today.

Anonymous said...

we used to fade the market when VIX got more than 10% away from it's 10DMA, nowadays fade the market on a daily move of 10% in VIX itself!...the sovereign wealth funds battling all the other institutions has brought out too much volatility for the average investor, if we were lucky enough to be long entering today, book em danno!...with VIX printing -16% today the next trade in SP is a short, but might not happen until midnite on a 'sell the news' election decision...
-deacon

Bill Luby said...

Indeed today is looking like a great day to take some profits...

Anonymous said...

Is there a web source for the HV10?

Bill Luby said...

I am not aware of a web source for HV10 off the top of my head. Readers?

Anonymous said...

whats wrong with ivolatility.com for finding 10 day HV's??

Bill Luby said...

You're right, of course.

iVolatiliy.com is usually the first place to look for volatility data. I omitted them because I don't believe the 10 day HV info is available without a subscription package, but by all means, readers should check out the various subscription packages at this site to see what is available.

Cheers,

-Bill

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