{"id":516,"date":"2009-04-21T14:08:24","date_gmt":"2009-04-21T19:08:24","guid":{"rendered":"http:\/\/www.vanderbilt.edu\/magazines\/vanderbilt-business\/?p=516"},"modified":"2015-07-07T20:19:08","modified_gmt":"2015-07-07T20:19:08","slug":"the-fear-index-and-derivatives","status":"publish","type":"post","link":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/the-fear-index-and-derivatives\/","title":{"rendered":"The ‘Fear Index’ and derivatives"},"content":{"rendered":"

\"Wallstreet\"<\/a>As the world financial panic set in motion by the subprime mortgage crisis reached full steam in late September, Bob Whaley\u2019s phone began ringing. Interest in what financial writers call the \u201cFear Index\u201d was spiking as stock prices plummeted and major Wall Street firms collapsed, and much of it was directed his way. The Fear Index, which is more properly known as the Chicago Board Options Exchange Market Volatility Index (VIX) and which has offered a real-time gauge of market jitters since 1993, was, after all, Whaley\u2019s brainchild.<\/p>\n

Whaley, Valere Blair Potter Professor of Management and an expert in derivative securities, did some interviews, but became increasingly annoyed by the articles and commentaries he saw. One after the other contained assertions he saw as \u201cutter nonsense\u201d\u2014that the VIX was a self-fulfilling prophecy, that it was at unprecedentedly high levels, that it was a contrarian indicator.<\/p>\n

\u201cPeople were saying all sorts of unsupportable things,\u201d he says, \u201cso I decided to write a short piece that puts everything in proper perspective and corrects misconceptions people have because they haven\u2019t dug deeply enough.\u201d<\/p>\n

For most people, the VIX, like the wider world of derivatives it reflects, skulks in a back alley of the financial world until there is a crisis, when it is hauled in for questioning that amounts to hysterical accusation rather than rational information gathering. What\u2019s more, the recent fates of even the biggest, most savvy firms make clear there was more than enough ignorance\u2014coupled with greed\u2014to go around. If ever a subject called for light rather than heat, it is this one.<\/p>\n

\u201cIt is not new,\u201d Whaley says of the index. \u201cIt is not at unprecedented levels. And it does not cause volatility.\u201d<\/p>\n

It is, he contends, simply \u201ca measure of expected stock market risk\u201d set by the actions of investors as they work to protect their assets. More fully, the VIX is a weighted blend of prices for options on the Standard & Poor\u2019s 500 Index (prior to Sept. 22, 2003, it was the S&P 100). Those options are in essence insurance policies protecting investors against broad-based market swings. The premiums they are willing to pay indicate their level of apprehension\u2014hence the term \u201cFear Index\u201d\u2014about the market volatility they anticipate in the short term.<\/p>\n

Whaley is amused by claims that the VIX is a contrarian indicator.<\/p>\n

\"Whaley<\/a>
Whaley is keen to debunk myths about the VIX.<\/figcaption><\/figure>\n

\u201cOne commentator said in September that since the VIX was above 35 it was time to buy stocks,\u201d he says. \u201cThe only time a contrarian indicator makes sense is after the fact. While 35 might have been high relative to its recent history, it increased steadily to a level of over 80 in the days afterward. If you\u2019d taken his advice, you\u2019d have lost your shirt. The stock market fell by nearly\u00a030 percent.\u201d<\/p>\n

He is similarly dismissive of its power as a self-fulfilling prophecy that adds to market anxiety.<\/p>\n

\u201cThis type of thinking is exactly backward. The degree of market anxiety is reflected in investor demand for portfolio insurance, which sets the level of the VIX. Saying that the market is better off without the VIX is akin to an ostrich hiding its head in the sand.\u201d<\/p>\n

As for historic highs, the VIX is in one sense nowhere near them\u2014projected backward, it reached its peak during the October 1987 market crash, spiking to levels well above 150. Since September 2008\u2014the month that marked the beginning of the stock market\u2019s deep dive\u2014the VIX has not exceeded 90. On the other hand, its recent sustained level of more than 35 marked only the fourth time the index had spent more than 20 days in that range.<\/p>\n

\u201cSo, yes,\u201d says Whaley, \u201cwe are experiencing abnormal behavior, but, no, it\u2019s not unprecedented. We just tend\u00a0to forget.\u201d<\/p>\n

This article is an abridged version of the one that appeared in the Winter 2009 edition of<\/em> OwenIntelligence. To read it in its entirety, click here<\/a><\/em>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

As the world financial panic set in motion by the subprime mortgage crisis reached full steam in late September, Bob Whaley\u2019s phone began ringing. Interest in what financial writers call the \u201cFear Index\u201d was spiking as stock prices plummeted and major Wall Street firms collapsed, and much of it was directed his way. The Fear […]<\/p>\n","protected":false},"author":341,"featured_media":9255,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[66,12],"tags":[27],"class_list":["post-516","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-departments","category-inside-business","tag-spring2009"],"_links":{"self":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts\/516","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/users\/341"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/comments?post=516"}],"version-history":[{"count":3,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts\/516\/revisions"}],"predecessor-version":[{"id":9258,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts\/516\/revisions\/9258"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/media\/9255"}],"wp:attachment":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/media?parent=516"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/categories?post=516"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/tags?post=516"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}