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The Fear Index: Vix and Vstoxx?

Volatility is rapidly becoming an asset class of its own right.  It is now used both by hedge funds in speculation and as a hedging instrument for traditional equity investors.  The measure of volatility in US is known as Vix (Chicago’s volatility index) and in Europe is called Vstoxx.

The chart below illustrates the surge in trading volume of volatility across US, Europe and Asia.


Historically, Vix and Vstoxx indices have been tightly correlated.  However, both have increasingly diverged this year.  Vix has held below 20 for almost a month, levels generally last seen before the fall of Lehman Brothers.  Vstoxx, on the other hand, has held above 25 since early April.  In part, this is a natural reflection of the different outlooks for the US and Europe.  In addition, the Vix tracks the expected volatility of a larger and broader set of stocks, while the Vstoxx is skewed towards more turbulent financial shares.  As a result, it has almost always traded higher than the Vix as shown below:


However, the divergence is significantly big – the spread is more than 10 points, well above the 3-4 point average over the past decade, according to Deutsche Bank.  At its peak last autumn, it hit 15 points as shown below:


Accordingly, Vstoxx surges have tended to presage a rising Vix, and over time the relationship between the two tends to revert to the mean.  What is the implication?  It means that despite that US economic prospect is better, US investors should prepare for a bumpier ride than is currently implied by the Vix.

Interestingly, on 20120415, John Dizard wrote an article “Vix Products are Not for Rational Investors”.  According to him, when one buy Vix/Vstoxx futures or options, it is perceived to be buying ‘volatility’ per se, but in reality, it is not because those products are based on the prices of forward start variance swaps!  In Dizard’s opinion, “Vix products are neither a threat to the world financial system, nor a great way for the public to make money or protect its portfolios from real world risks.”


  1. Financial Times, John Dizard, 20120415, “Vix Products are Not for Rational Investors”
  2. Financial Times, Robin Wiggleworth, 20120508, “Vix is not frightened enough”