Down with volatility, and down with volatility indices | FT Alphaville

Down with volatility, and down with volatility indices

The fear gauge. The chaos barometer. The weathercock of mild investor perturbation. Vix, Chicago’s almighty options volatility index, has been going down of late — having breached 17 on Wednesday, indicating that anxiety in equities is at its lowest since May 2008.

Except — maybe Vix doesn’t indicate anything useful at all.

Birinyi Associates have come out with a study suggesting a large dose of scepticism is needed when trying to divine Vix. Details from BusinessWeek, emphasis ours:

Traders use the VIX as a gauge of investor fear because it’s derived from the cost of options that insure against losses from stocks. Birinyi’s research found that the index has little to no real connection to future equity prices and instead tends to move in lockstep with shares.

The VIX is a coincidental indicator with limited predictive value,” according to the study by Laszlo Birinyi and analyst Kevin Pleines that was released today. “It details, perhaps better than other measures, the volatility of the market today but not tomorrow or the day after.”

Not everyone agrees, of course — such as David Penn of Trading Markets:

Larry Connors [of Connors Research] showed that when traders compare the VIX to itself over the short term – for example, comparing the VIX to a 10-day moving average of the VIX – this widely used indicator actually has a very good track record of helping short term traders anticipate and trade market turns. The trick is to see the VIX as a very dynamic indicator, not a static one.

Fine — but that’s no chaos barometer.

Related links:
A Vix bottom? – FT Alphaville
Vix vs Vix challenger – FT Alphaville
An all-time record for the Vix – FT Alphaville