Search interesting materials

Saturday, January 21, 2006

A sharp rise in the VIX

Just last friday (14th January 2005), I wrote a blog entry saying that the VIX was very low, and it made a lot of sense to buy protection using put options on the S&P-500 at an implied volatility of 11%.

The VIX just rose and rose after that! [News story about VIX on Friday] The first opening price after that friday was at 12%. On Friday the 20th, it went up to 14.56%. Here's a table of the relevant data. While it's risen sharply, it's still at very low values by historical standards. I think all eyes will be on the VIX on Monday.

What happened!? Global equity markets have certainly become a lot more nervous. I could discern one potentially important piece of new bad news: that high US consumption based on home equity extraction could be coming to an end.


  1. I have read a number of reports that predict a pickup in volatility over the course fo 2006. To understand this further, I think we need to be clear on the reasons for such a prolonged period of low vol (End 2004, Whole of 2005). The conventional arguments that you would generally hear for the causes of low vol:
    Regime of low/decreasing interest rates-->Investors appetite for yield-->Leading to higher amounts of risk they need to take on -->Resulting in a "herd" kind of behaviour where traders collectively "beat down" volatility by say selling put options.....

    My questions are: Is the above line of argument really valid??
    Will 2006 see a decrese in the appetite for investors towards risk??

  2. I personally don't have a judgment about how the VIX will play out in 2006. I am just a consumer of the VIX. I find the situation with global macroeconomic imbalances to be terrifying. When we add up : the US current account deficit, the US housing market, the fixed investment and real estate stories in China, the broken Chinese financial system, the gigantic reserves accumulation of East Asia: it all adds up to a picture that should scare any reasonable person.

    Can low interest rates lead to a quest for yield and artificially depressed implied volatilities? I believe so. I think there isn't enough smart money in the world to take offsetting positions against the pension funds and insurance companies when they are in a quest for yield. E.g. insurance companies (largely in Europe) have taken up gigantic US credit risk exposures.


Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.