VIX, the Chicago Board Options Exchange's CBOE Volatility Index, measures the stock market's expectation of volatility based on S&P 500 index options. It is calculated and disseminated on a real-time basis by the CBOE, and is often referred to as the fear index or fear gauge.
The VIX bases its origin to the financial economics research of Menachem Brenner and Dan Galai, "New Financial Instruments for Hedging Changes in Volatility", published in Financial Analysts Journal (1989). In 1992, the CBOE hired consultant Robert Whaley to calculate values for stock market volatility based on this theoretical work.
In 2004, VIX Index Futures won the Most Innovative Index Product Award and the Most Innovative Index Product at the presentation of the William F. Sharpe Indexing Achievement Awards two years later.
The original VIX Index, was developed by Professor Robert E. Whaley, one of the creators of the Barone-Adesi and Whaley pricing model generalizing the Black & Scholes model to American style. The VIX Index was introduced by CBOE in 1993, and constructed using the implied volatilities of eight different OEX option series so that, at any given time, it represented the implied volatility of a hypothetical at-the-money OEX option (S&P 100 Index) with exactly 30 days to expiration.
In 2003, this construction changed. It still measures the market's expectation of 30-day volatility, but in a way that conforms to more recent thinking and research among industry practitioners. The "new" VIX (based now in the S&P 500 Index), uses a newly developed formula to derive expected volatility directly from the prices of a weighted strip of options.
Implied Volatility indexes in the world
Similar methodologies are applied to other national or regional indices:
- VDAX (German DAX index)
- VCAC (French CAC40 index)
- VAEX (Deutsch AEX index)
- VBEL (Belge BEL20 index)
- VFTSE (UK FTSE 100 index)
- VSTOXX (EURO STOXX 50 index)
- etc ...
Below is a chart representing the VIX and S&P 500 index level during 2019 . As can be seen from the lines chart that there is a strong negative correlation between these two indexes.
According to IFRC, the correlation in this period from January, 2019 to December 2019 between VIX and S&P 500 Index variations is -0.83 which indicates that one variable increases whenever the other decreases and vice versa. IFRC had conducted many researches about the relationship between sentiment indicator VIX and other famous indexes from the U.S. stock market (Dow Jones Index, NASDAQ Index, etc) and found out that this negative correlation did not just only happen in 2019 but has been staying consistently from many years up to present.
Graph 1: Comparison VIX vs S&P 500 (Year 2019)