Repost to David's Tweet about the VIX

[emilioalzamora1]

Hi @David Harper CFA FRM,

Coincidentally I came across the following two interesting contributions at MarketWatch and CNBC about VIX and correlations; it is worth to have a glance at them:

'Jeffrey Saut, chief investment strategist at Raymond James, comes to that conclusion using a little valuation math.He believes the CBOE Volatility Index, the market's fear gauge, is running low not because of too much complacency but rather as part of an "upside consolidation" taking place that has pushed the market to record highs. The VIX, as it is called, uses options to measure the market's expected annualized change over the next 30 days. It's been running around 10, compared with a historical average closer to 20.'

http://www.cnbc.com/2017/05/02/calculation-means-stocks-could-rise-another-30-percent-from-here.html

http://www.marketwatch.com/story/why-a-rising-vix-isnt-rattling-markets-like-youd-expect-2017-04-13

[Thanks, for sharing WSJ's article 'Rob Arnott: Godfather of Smart Beta']. Should make it into the Week of Risk!

 

[David Harper CFA FRM]

Thank you @emilioalzamora1 ... my favorite part of the CNBC video clip explaining low VIX is "we've been calm and summer is coming" !! Believe it or not, there is another article today on low VIX https://www.wsj.com/articles/the-investor-anxiety-that-the-markets-fear-gauge-is-missing-1493890217 ; eg, "The gauge’s low this week suggests investors are relying less on S&P 500 index options for protective insurance on their portfolios. Market watchers say investors are instead using alternative ways to manage risk in their holdings, such as options strategies that generate income as well as options on U.S. government bonds."

This is 3 years old from Matt Levine (who is one of my favorite finance bloggers) with some interesting context, he has since taken to arguing that VIX is effectively a measure of recent realized volatility (due to the empirical patterns) because that seems to be a pretty good proxy for 30-day implied volatility https://www.bloomberg.com/view/articles/2014-06-09/the-vix-is-not-a-great-way-to-measure-complacency So he stresses the fact that it's only a 30-day implied volatility:

And there is a further problem. A share of stock is a perpetual thing, more or less; you can talk sensibly about stock valuations reflecting people's expectations for the coming, like, decades. Uber is not valued at $17 billion based on this year's GAAP net income. The VIX, on the other hand, is a necessarily short-dated thing: It's implied volatility for the next month. 5 If you expect 2018 to be a great year for Uber, go ahead and bid up Uber's stock. If you expect 2018 to be volatile, there is absolutely no reason to buy options on the S&P 500 index that expire in July 2014. Those options will do nothing for you in 2018. Stock prices discount the entire future, somehow or other. The VIX discounts a month.