scorecardresearchWhat is volatility index and what does a spurt in the index mean for investors? We explain

What is volatility index and what does a spurt in the index mean for investors? We explain

Updated: 28 Dec 2021, 08:54 AM IST
TL;DR.

A sudden crash or jump in the market index makes the market look volatile and unpredictable. But how can one measure its pace of unpredictability in future? There is an index — Volatility index — that does exactly this. Let us decode what it means

Volatility is seen as a measure to assess market sentiment, and in particular, the degree of fear among market participants.

Volatility is seen as a measure to assess market sentiment, and in particular, the degree of fear among market participants.

The volatility index is a quantifiable measure of volatility based on the Nifty Index Option prices. It is an important indicator of market risk and investors’ sentiments. It is calculated in percentage and does a projection of how fast the prices would change in the next 30 days.

Volatility is seen as a measure to assess market sentiment, and in particular, the degree of fear among market participants. It is calculated from the best bid-ask prices of Nifty Options contracts.

Is VIX an Indian index?

As a matter of fact, VIX is a trademark of Chicago Board Options Exchange (CBOE). The NSE uses this index with requisite permissions to use it in the context of Indian stock markets.

In fact, India VIX uses the same computation methodology which CBOE uses, but with certain changes, of course, to adapt to the Nifty options.

Rise or fall

When the market index (Nifty) suddenly spurts or falls, the projection of how fast the stock prices would change in the immediate future would also change. When the market trades flat for several days in a row, the volatility index would naturally stay low. In other words, the volatility index rises with extreme price changes.

 

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We explain volatility index in this infographic.

 

For instance, when in March 2020 the nationwide lockdown was announced in the wake of the pandemic, the stock markets in India crashed by 3,000 points in one month. This triggered a massive spurt in the VIX by 83 percent towards the month end.

So, we can highlight that volatility index (VIX) is a key indicator of market risk as well as of investors’ sentiments. It makes a projection of how fast the prices would change in the forthcoming 30 days.

 

First Published: 28 Dec 2021, 08:54 AM IST