The market sentiment indicator
The S&P/ASX 200 VIX (A-VIX) is a real-time volatility index that provides investors, financial media, researchers and economists an insight into investor sentiment and expected levels of market volatility. The index tracks S&P/ASX 200 index option prices as a means of monitoring anticipated levels of near-term volatility in the Australian equity market.
Read A-VIX report
S&P/ASX 200 VIX Futures
ASX launched S&P/ASX 200 VIX futures on 21 October 2013. S&P/ASX 200 VIX futures enable market participants to trade anticipated changes in Australian equity market volatility in a single transaction. S&P/ASX 200 VIX futures are an ASX-listed product that enables trading participants to more easily hedge, trade and arbitrage anticipated volatility in the Australian equity market.
Since a volatility index at relatively high levels implies a market expectation of very large changes in the S&P/ASX 200 while a relatively low VIX value implies a market expectation of very little change, the S&P/ASX 200 VIX will often move inversely to the equity market. The following chart plots the S&P/ASX 200 VIX and the Australian equity market benchmark index, the S&P/ASX 200, over a eight year period from January 2008 to January 2016 and illustrates the inverse relationship between the two indices.
The S&P/ASX 200 VIX is primarily used as an indicator of investor sentiment and market expectations. A volatility index at relatively high levels generally implies a market expectation of very large changes in the S&P/ASX 200 over the next 30 days, while a relatively low volatility index value generally implies a market expectation of very little change.
Similarly, when the volatility index is at relatively high levels and market expectation is for high levels of volatility, investor sentiment is perceived to be uncertain. Conversely, when the volatility index is at relatively low levels, market expectation is for low levels of volatility which implies greater levels of investor confidence.
Volatility indicators such as the S&P/ASX 200 VIX are often perceived to exhibit characteristics of mean reversion by oscillating around a long term average (or mean). In other words, a move away from the long term average towards high or low extremes is usually followed by a move back towards the long term average. The implication of mean reversion is that high levels of volatility are followed by a return to more normal levels of volatility and very low levels of volatility are often pre-cursors to an increase in volatility.
The S&P/ASX 200 VIX value is similar to rate of return volatility with the volatility index reported as an annualised standard deviation percentage that can be converted to a shorter time period. For instance, a volatility index value of 20% can be converted to a monthly figure remembering that volatility scales at the square root of time. The formula to do this is:
In the above example, index options over the S&P/ASX 200 are incorporating the potential for a one standard deviation return over the next month of +/- 5.77%.
The true cost of hedging Australian equities with a non-Australian VIX
In this research note we quantify the cost of ignoring divergences between Australian and US equity markets and hedging an Australian equity portfolio volatility with a US VIX future.
The CBOE Volatility Index (VIX)
A CBOE white paper that describes the methodology behind the CBOE Volatility Index (VIX)
CBOE NASDAQ-100 Volatility Index
An overview of the CBOE Nasdaq-100 Volatility Index (VXN) and the futures contract based on the VXN offered by CBOE Futures Exchange
Volatility at World's End: Deflation, Hyperinflation and the Alchemy of Risk, Artemis Capital Management
Research paper from Artemis Capital Management on the pricing of risk as the major economies navigate between inflation and deflation.
VIX Futures and Options – A Case Study of Portfolio Diversification During the 2008 Financial Crisis
A University of Massachusetts study on the effectiveness of portfolio diversification through the addition of VIX futures and options.
Summary: “VIX Futures and Options – A Case Study of Portfolio Diversification During the 2008 Financial Crisis.”
A two-page summary of the University of Massachusetts study on the effectiveness of portfolio diversification through the addition of VIX futures and options.
VIX Your Portfolio: Selling Volatility to Improve Performance
A BlackRock Investment Insights Issue examining the effectiveness of strategies that sell volatility with the objective of improving portfolio performance.
Note: ASX is not associated with or sponsored by CBOE.
Disclosure – ASX-Vix Contract
Goldman Sachs Australia Pty Limited (ABN 21 008 797 897 – “GSA”) and ASX Operations Pty Limited (ABN 42 004 523 782 - “ASX”) have entered into an arrangement to promote to clients of GSA and its affiliates the awareness of the S&P/ASX 200 VIX Futures Contract (Ticker: A-VIX) (hereafter “Vix Contract”) which commenced trading on the ASX Clear (Futures) venue on 21 October 2013. ASX have engaged GSA given their market leading knowledge and global trading capabilities in similar volatility contracts. The arrangement entered into is currently set to run for a period not exceeding three (3) years, with GSA being granted an option to extend this initial term for an additional period of two (2) years.
Under the terms of the arrangement GSA will host a number of events in Australia and across Asia for clients of GSA and its affiliates to discuss and promote the Vix Contract. GSA will also produce materials to promote the product among its clients. For both events hosted by GSA and materials specifically produced under the terms of the arrangement, disclosure will be included regarding the role of GSA and ASX in the promotion of the Vix Contract. The ASX has agreed to pay a marketing activity payment payable by 2 equal instalments, as well as a revenue share arrangement linked to the success of the Vix Contract. The revenue share arrangement will only apply once the ASX net revenue from the Vix Contract exceeds the total value of marketing activity payments made as at that date, and shall thereafter be a base amount of 10%. GSA will also receive a portion equal to 40% of the ASX net revenue contributed by GSA.
GSA does not have a role as a Market Maker for the Vix Contract however will be offered, subject to entering into a Market Making Agreement, an opportunity should one of the existing providers either fail to take up the offer or cease to be a Market Maker in the Vix Contract.