Monday, July 12, 2010

Unusual Volatility Index Divergence

Since I have not seen this mentioned elsewhere, I thought I should point out that there was an interesting and very unusual divergence in the major U.S. volatility indices today. As the chart below shows, both VXO and RVX posted substantial gains, up 5.7% and 4.5% respectively. The other three major volatility indices declined, with VXN down 1.9%, VIX down 2.2% and VXD down 3.6%.

With no obvious gaps in any of the charts nor a single index outlier, there are no obvious signs of bad data at work. While correlations among these five indices run in the 97% - 99% range and divergences are largely accounted for by different market capitalizations, the fact that the two gainers were the large cap VXO and the small cap RVX makes today's numbers particularly difficult to explain.

Frankly, I am a loss for a good way to account for the discrepancy. The drop in the VIX futures and VIX ETNs (VXX and VXZ) suggests to me that perhaps VXO and RVX were hit with a similar technical glitch, but I have not seen any public statement to support this.

Anyone care to venture an explanation?

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


Disclosure(s): neutral position via options in VIX at time of writing

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