What comes to mind when you hear the phrase “U.S. stock market volatility?” You could think of the VIX—the CBOE Volatility Index, sometimes known as “the fear index,” which is made up of the implied volatilities of a basket of short-term options on the S&P 500 Index (SPX), and is frequently regarded as the U.S. market’s volatility benchmark.
Let’s take a look at some of these indices and how you may use them to assist evaluate uncertainty in a number of market segments because VIX is simply one data point in one asset class.
In its simplest form, volatility (abbreviated “vol” for short) is the degree of market price variability over a certain period of time. Volatility can therefore in a sense help you gauge how hazardous an asset could be. The perceived danger increases as volume increases.
Vol occurs in two fundamental varieties: inferred and historical. Historical volatility, also known as “realized volatility,” is an evaluation of the past volatility of an asset over a given time period. However, implied volatility is a projection based on the current market values of listed options.
The implied vol of a basket of options on the S&P 500 Index (SPX), standardized to a 30-day constant maturity, is an example of implied vol and is what the VIX represents. Consider it a consensus prediction of future volatility based on the pricing of options that will expire during the next several weeks.
Some traders claim that the stock market goes up like an escalator but goes down like an elevator. As markets decline and as VIX jumps, it frequently becomes front-page business news. This tendency (or at least the dread of it) implies that the stock market tends to move in the opposite direction of indicated volatility, which is partly why the Volatility Index is known as the “fear index.”
However, volatility indices are more than just catchy headlines; some traders also utilize them to aid in portfolio selection, asset allocation, diversification, and for some, even market timing.
Equity Volatility Indexes: Beyond Beta
The beta of an asset, which measures how volatile it is in relation to the market as a whole or, in the case of equity investments, against an industry benchmark like the S&P 500, is one factor that was traditionally taken into account when determining how dangerous a stock investment could be. However, the beta is not a perfect metric. When determining projected variability vs the benchmark, beta, like historical vol, solely takes into account prior movement relative to the benchmark. Additionally, because beta is a single figure and not an index or time series, it is unable to provide information on how an asset may have fared throughout various market circumstances, such as bull and bear markets.
The Volatility Index World
Additionally, CBOE releases volatility indices for the Russell 2000 and the Dow Jones Industrial Average (VXD) (RVX). Additionally, the exchange group releases vol indexes for a select number of widely-held equities and exchange-traded funds (ETFs). Other vol indexes include those for the energy, metals, interest rates, and foreign currency sectors and asset classes. Even a VIX of VIX exists (VVIX).
You can evaluate the possible hazards in particular market segments with the use of these and other volatility indicators. They can explain how volatile particular stocks or industries have been in comparison to other investing options. They may also show you how certain assets fared under pressure from the market.
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