It is true that the financial sector has been under a lot of stress recently, but what is the overall market’s perception, and where do we stand in terms of where we have been before?
Here is where the VIX index kicks in. It is intended to represent the 30-day expected volatility of the S&P index, and it’s calculated via the use of options. During the 2008 crisis the index jumped to around 80 points, and during the start of the COVID-19 pandemic (March/April 20202) it was close to 65 points. At the moment, the index is around the 20 points mark and away from the 1-year high of 34.75.
Although it only represents 30 days, it is great to know that apparently this volatility is expected to go down. Are we headed for better times?
Very interesting analysis @enrique.marcilio. This may be a market indication that the recent bank bailouts/takeovers or whatever you want to call them has calmed investors fears of more substantial disruption. These things can end up being a self-fulfilling prophecy in that improved sentiment reduces volatility and this improved banks’ funding positions and balance sheets, making a funding crisis less likely. Let’s hope they are right.
It’s also interesting to appreciate as you have pointed out the VIX looks at market expectations implied from option prices, rather than the realised volatility computed from historical prices.
As you say, the fact that it considers market expectations implied from the aggregated options is really interesting! Many view the VIX index as the “fear” index in the market. Maybe the “fear” is going down? Fingers crossed for a good market!