VIX

VIX

The VIX is a widely followed volatility index created by the Chicago Board Options Exchange in 1993 that measures implied volatility of options on the S&P 500. It is used by market participants including investors at Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, and BlackRock as a barometer for risk sentiment during events such as the 2008 financial crisis, the Dot-com bubble, and the COVID-19 pandemic. Regulators and commentators at the Securities and Exchange Commission, Federal Reserve System, and European Central Bank reference it alongside indicators like the LIBOR and the CBOE S&P 500 PutWrite Index.

Overview

The index was designed by researchers at the Chicago Board Options Exchange and first published in 1993 as a gauge of 30‑day expected volatility derived from a wide range of S&P 500 option prices traded by firms such as Citigroup, Deutsche Bank, Barclays, and UBS. Market commentators from outlets including The Wall Street Journal, Financial Times, Bloomberg L.P., and Reuters treat movements in the index as proxies for investor anxiety during geopolitical crises like the Iraq War, the Russian invasion of Ukraine (2022), or fiscal events such as the Greek government-debt crisis. Institutional investors from Vanguard, Fidelity Investments, and State Street Corporation monitor the index alongside asset classes tracked by the MSCI World Index and the Bloomberg Barclays US Aggregate Bond Index.

Calculation and Methodology

The methodology computes a model-free measure using near-term and next-term S&P 500 option prices across a continuum of strikes, aggregating implied variance for a 30‑day horizon. The calculation uses option quotes from exchanges such as the Cboe Options Exchange and clearing by Options Clearing Corporation, employing interpolation techniques similar to those used in academic studies by scholars at Massachusetts Institute of Technology, University of Chicago, and Stanford University. Practitioners at firms like Susquehanna International Group, Two Sigma Investments, and Renaissance Technologies use the index with derived measures such as variance swaps traded among counterparties including Goldman Sachs and Morgan Stanley. The formula adjusts for interest rates observable via the U.S. Treasury yield curve and contrasts with historical realized volatility computed from indices maintained by S&P Global and research centers at National Bureau of Economic Research.

Historical Behavior and Notable Events

The index spiked dramatically during the Black Monday (1987) aftermath adjustments in derivatives pricing history, rose sharply during the Dot-com bubble collapse and surged during the 2008 financial crisis when major institutions like Lehman Brothers and AIG were central to market stress. During the 2010 Flash Crash, the index reflected episodic volatility alongside trading anomalies investigated by the Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission. In 2011, the index reacted to the United States debt-ceiling crisis and ratings action by Standard & Poor's. The index reached historic intraday moves during the onset of the COVID-19 pandemic as authorities such as the World Health Organization and central banks reacted with emergency measures. Extreme readings have followed events involving sovereign crises like the Argentine economic crisis and contagion episodes involving banks such as Banco Santander and Deutsche Bank.

Market Uses and Trading Instruments

Market participants use the index for hedging, speculation, and portfolio insurance via instruments including futures and options listed on the Cboe Futures Exchange, exchange-traded products issued by ProShares and iShares, and structured products sold by banks like Barclays and Credit Suisse. OTC instruments include variance swaps and volatility swaps negotiated between institutional counterparties such as Goldman Sachs and Citigroup. Asset managers at BlackRock and State Street incorporate volatility overlays into funds benchmarked to S&P 500 indices, while proprietary trading desks at Jane Street and Citadel LLC execute strategies using futures spreads and calendar spreads. Academics at Harvard Business School and London School of Economics have studied VIX-based strategies in hedge funds like those run by Paul Tudor Jones and Ray Dalio's Bridgewater Associates.

Criticisms and Limitations

Critics including commentators at The Economist and researchers at National Bureau of Economic Research note that the index reflects implied, not realized, volatility and can be influenced by option supply-demand dynamics driven by market makers from firms such as Optiver and IMC Trading. The index's reliance on traded option prices exposes it to liquidity distortions observed during events investigated by the Financial Stability Board and regulators at the Office of the Comptroller of the Currency. Academics at Columbia University and New York University have highlighted model and interpolation sensitivities relative to historical measures produced by S&P Global Market Intelligence. Additionally, structured products and ETFs tied to the index can suffer from roll yield and replication error noted by researchers at Princeton University and critics at Morningstar, Inc..

Category:Financial indices