The Chicago Board Options Exchange developed the VIX in 1990 to predict future stock market volatility. The VIX is a real-time indicator that represents market participants' volatility predictions for the following 30 days. When the S&P500 falls, the index rises when it rises, demand for protection falls. The VIX is a gauge of market emotion, thus the name "fear barometer" In negative stock market conditions, the VIX increases, whereas in bullish stock market environments, it decreases or stays constant. This is because of the stock market's long-term bullish tilt and high demand for options.
The VIX was created in 1990 by the Chicago Board Options Exchange ( CBOE ) to serve as a benchmark for forecasting future stock market volatility. It is a live indicator that reflects market participants' volatility forecasts for the next 30 days. At the most basic level, they constructed the VIX index utilizing weekly and traditional SPX index options, as well as their implied volatility levels. Based on market participants' conduct in the options market, we may conceive of implied volatility as anticipated volatility. Understanding why the VIX swings in the opposite direction of the S&P500 is critical since the volatility index acts as a barometer of market emotion, thus the nickname "fear barometer."
What's the big deal about it?
The S&P500 VIX rises in bearish stock market circumstances, whereas it falls or remains constant in bullish stock market conditions. This is due to the stock market's long-term bullish bias and the fact that the VIX is calculated using implied volatility. Implied volatility increases when there is a strong demand for options, which typically happens during SPX price declines as market participants (who are collectively bullish) rush to buy portfolio protection (put options). When the S&P500 climbs, so does demand for protection, and the VIX declines. This tendency is likely to have accelerated in recent years, as the VIX has evolved from a market gauge of volatility to a tradable asset class of product offerings on various futures, stock, and options markets. The connection between the S&P500 and the VIX is simply referred to as the S&P500 VIX correlation. In the graph above, I can detect a substantial negative relationship between the stock market and the VIX. The indicator increases when the stock market declines. Since the VIX's introduction in 1990, the correlation between daily variations in the S&P500 and the VIX has been -77 percent. Over the past 10 years, the negative connection has become even greater, currently stands at -81 percent, up from -74 percent prior to October 2008. The tighter relationship may be due to the many products created over the past 10-15 years that allow market participants to trade the VIX. Since previously stated, this explains why we see larger increases in the VIX when the market falls, as VIX trading produces exaggerated changes in implied volatility.
The VIX was created in 1990 by the Chicago Board Options Exchange ( CBOE ) to serve as a benchmark for forecasting future stock market volatility. It is a live indicator that reflects market participants' volatility forecasts for the next 30 days. At the most basic level, they constructed the VIX index utilizing weekly and traditional SPX index options, as well as their implied volatility levels. Based on market participants' conduct in the options market, we may conceive of implied volatility as anticipated volatility. Understanding why the VIX swings in the opposite direction of the S&P500 is critical since the volatility index acts as a barometer of market emotion, thus the nickname "fear barometer."
What's the link between the two?
The VIX rises in bearish stock market circumstances, whereas it falls or remains steady in bullish stock market conditions. This is due to the stock market's long-term bullish bias and the fact that the VIX is calculated using implied volatility. Implied volatility increases when there is a strong demand for options, which typically happens during S&P500 price declines as market participants (who are collectively bullish) rush to buy portfolio protection (put options). When the S&P500 climbs, so does demand for protection, and the VIX declines. This tendency is likely to have accelerated in recent years, as the VIX has evolved from a market gauge of volatility to a tradable asset class of product offerings on various futures, stock, and options markets.
The correlation between the SPX and the VIX is simply the connection between the SPX and the VIX. In the graph above, I can detect a substantial negative relationship between the stock market and the VIX. The indicator increases when the stock market declines. Since the VIX's debut in 1990, the correlation between daily changes in the SPX and the VIX has been -77 percent. Over the past 10 years, the negative connection has become even greater, currently stands at -81 percent, up from -74 percent prior to October 2008. The tighter relationship may be due to the many products created over the past 10-15 years that allow market participants to trade the VIX. Since previously stated, this explains why we see larger increases in the VIX when the market falls, as VIX trading produces exaggerated changes in implied volatility. The relationship between the S&P 500 and the VIX has been consistent and reliable throughout time. The rolling 1-year correlation between daily changes has averaged about 83 percent over the past 10 years, staying within a relatively tight range of -70 percent to -90 percent. And the VIX has been consistent and reliable throughout time. The rolling 1-year correlation between daily changes has averaged about 83 percent over the past 10 years, staying within a relatively tight range of -70 percent to -90 percent.