The Evolution of the VIX (1)
Volatility is
notorious for clustering in the short-term, mean-reverting
in the medium-term and settling into multi-year macro
cycles over the long-term. I have
chronicled each of these themes in this space in the past.
Apart from volatility, I have also taken great pains to talk about the movements
of the VIX, which is one of the most famous instances of implied
volatility and represents investor expectations about future volatility in
the S&P 500 Index for the next thirty calendar days. Surprising to some, the VIX and volatility
(which generally refers to realized or historical
volatility), while correlated, are very different animals. Not only are these two very different, their
evolutions have been very different as well.
Volatility, which has a much longer history, seems to exhibiting the
same traits that it has exhibited throughout its lifetime, with relatively
modest tweaks around the edges from time to time.
The same cannot be said for the VIX. One thing about the VIX that has changed in the three decades or so of VIX data is the speed at which the VIX has moved up and down. In a nutshell, VIX cycle times have shortened dramatically. In other words, the VIX now has a tendency to spike much faster and mean-revert downward much faster as well. This phenomenon has been ongoing for the past decade or so, but it became more pronounced following the Brexit craziness – or at least the first chapter of the Brexit craziness.
One way you can see how the changes in the VIX have differed from the changes in the volatility of the SPX is to look at volatility spikes.
In the first graphic, below, I show the number of days per year with 2% and 4% moves in the SPX going back to 1990. Take note of the ebbs and flows in volatility and the clustering of volatility around the dotcom bubble and again around the 2008 Great Recession.
[source(s): CBOE, Yahoo, VIX and More]
In the second
graphic, I plot annual VIX spikes
of 20% or more for each year going back to 1990. Note that while visual inspection does not reveal
any obvious trend in the SPX volatility data, the VIX spike data for the same
period show a pronounced upward trend, reflecting the heightened sensitivity of
the VIX to changes in volatility of the SPX.
In other words, even though volatility may be the same, the VIX is
becoming more sensitive to volatility. Another
example that supports this point: of all
the one-day spikes in the VIX of 30% or more, 71% have happened in the past decade and only
29% are from the previous two decades.
The volatility landscape may or may not be changing, but the VIX is.
[source(s): CBOE, Yahoo, VIX and More]
Further
Reading:
Clustering
of Volatility Spikes
Putting
Low Stock Volatility to Good Use (Guest Columnist at Barron’s)
What
My Dog Can Tell Us About Volatility
My
Low Volatility Prediction for 2016: Both Idiocy and Genius
What
Is Historical Volatility?
Calculating
Centered and Non-centered Historical Volatility
Rule
of 16 and VIX of 40
Shrinking
VIX Macro Cycles
Chart
of the Week: VIX Macro Cycles and a New Floor in the VIX
The
New VIX Macro Cycle Picture
Recent
Volatility and VIX Macro Cycles
VIX
Macro Cycle Update
Was
2007 the Beginning of a New Era in Volatility?
VIX
Macro Cycles
Last
Two Days Are #5 and #6 One-Day VIX Spikes in History
2014
Had Third Highest Number of 20% VIX Spikes
Today’s
34% VIX Spike and What to Expect Going Forward
All-Time
VIX Spike #11 (and a treasure trove of VIX spike data)
The
Biggest VIX Spike Ever: A Retrospective
VIX
Sets Some New Records, Suggesting Volatility Near Peak
Highest
Intraday VIX Readings
Short-Term
and Long-Term Implications of the 30% VIX Spike
VIX
Spike of 35% in Four Days Is Short-Term Buy Signal
VXO
Chart from 1987-1988 and Explanation of VIX vs. VXO
Volatility
History Lesson: 1987
Volatility
During Crises
Chart
of the Week: VXV and Systemic Failure
Forces
Acting on the VIX
A
Conceptual Framework for Volatility Events
For those who may be interested, you can always follow me on Twitter at @VIXandMore
Disclosure(s): short VIX at time of writing
