Market’s ‘Fear Gauge’ Nears 1993 Low

We cover VIX in the introductory lecture in Finance 4366. VIX measures expected short-term (30 day) stock market volatility. Changes in VIX are strongly negatively correlated with contemporaneous changes in the S&P 500 index; 80% of the time, when VIX closes up (down) on any given trading day, the S&P 500 index closes down (up) – see for yourself by clicking this link.

The long-run correlation (since 1990) between daily changes in VIX and the S&P 500 index is around -.7. VIX is commonly referred to as the “fear index”; when volatility is high, investors have to pay much more for options than when volatility is low. Since 1990, the average closing value of VIX stands at around 20; this past Monday, it closed at 9.77. The last time VIX was this low was back in December 1993; it’s lowest closing value ever recorded was 9.31 on December 12, 1993. The highest ever recorded closing value of VIX occurred during the throes of the Financial Crisis, hitting 80.86 on November 20, 2008.

A measure of expected stock volatility, known as Wall Street’s fear gauge, slid Monday to its lowest level in nearly a quarter-century.

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