Thursday, July 23, 2009

CBOE Launches Implied Correlation Index

Volatility watchers and risk managers have a new index to watch, starting next Monday: the CBOE S&P 500 Implied Correlation Index. The CBOE announced the new index in a press release yesterday, noting that the Implied Correlation Index will be tied to two different option maturities - January 2010 (ICJ) and January 2011 (JCJ). The values of ICJ and JCJ will be disseminated by the CBOE every 15 seconds during the trading day, as is done with the VIX.

The Implied Correlation Index does not calculate the correlations among the entire S&P 500 index. Instead, it utilizes a “tracking basket” of the 50 largest components of the SPX as measured by market capitalization. For more on the calculations involved in the Implied Correlation Index and related materials, check out the Implied Correlation Index splash page, the Implied Correlation Index white paper and historical data going back to the beginning of 2007.

I will discuss this index on the blog going forward, as it is clearly an important piece of the VIX valuation mystery. For now, readers may be interested to see how SPX component correlations (blue line) have compared with the VIX (red line) during the recent bear market.

[source: CBOE]

2 comments:

bzbtrader said...

And then there's this correlation between the SPX and the VIX that's been characteristic of the bear run since 12/07.
http://bzbtrader.blogspot.com/2009/07/when-vix-and-spy-move-together.html

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