Wednesday, March 3, 2010

Correlation of VIX and “VIX Index” Searches on Google

In retrospect, recognizing only one winner for the chart of the week contest was probably a little short sighted on my part, particularly given the very high quality of the entries.

Several readers have asked to see some of the other entries and I am happy to oblige. One of the contenders for the mythical silver or bronze medal certainly would have been a submission from Darren Miller of Attitrade. In the chart below, Darren has compared the level of the VIX with the relative frequency of Google searches for “VIX index” from the beginning of 2007 to the present.

Note that prior to the October 2008 VIX spike, there were more significant spikes in searches for information about the VIX than in the VIX itself. Following the VIX peaks in October and November 2008, the demand for information about the VIX subsided much more rapidly than the VIX index. In fact, according to the graphic, the “VIX index” search activity was back to pre-crisis levels by December 2008, whereas it took the actual index another year to make a comparable drop.

What does this mean? I’m sure Darren and others have their own interpretation, but the chart does bump up against some of the ideas I outlines in my availability bias and disaster imprinting series from last year:

In a nutshell:

“Disaster imprinting refers to a phenomenon in which the threats of financial and psychological disaster were so severe that they continue to leave a permanent or semi-permanent scar in one’s psyche. Another way to describe disaster imprinting might be to liken it to a low level financial post-traumatic stress disorder.”

In reviewing the chart of the VIX against corresponding Google searches, it is possible to conclude that availability bias and disaster imprinting are present in that searches for information about the VIX rapidly reverted to historical norms, while the level of the VIX itself was only gradually reduced over a period of months and months, creating a significant gap between the index and the search activity for almost all of 2009.

For more on related subjects, readers are encouraged to check out:

[source: Darren Miller, Attitrade]

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