Have you ever tried to use the VIX® to monitor market risk? The CBOE volatility Index (VIX®) is a popular view of equity market volatility, but there are a couple things you should know about the VIX® before using it exclusively.
First, make sure your time horizon is aligned with the VIX®. The VIX® effectively averages the implied volatility of put and call options for the Standard & Poor’s 500 Index. Since options are inherently forward-looking, this may seem like a reasonable approach for understanding future volatility, however, the nominal time horizon is just one month ahead.
Second, and perhaps more importantly, it may not reflect the true potential of a tail-risk event. The VIX® is a consensus-based measure. That means it’s a lagging or, at best, a coincident indicator of what the broad market thinks; this limits its use as a tool for detecting bubbles of unjustified consensus.
Most conventional approaches to understanding market risk have more value in establishing the rate at which prices fluctuate at the present or during the recent past, rather than when a major market shock is likely to occur.
That’s why we’ve introduced the Intech Equity Market Stress Monitor®. The monitor is a collection of five metrics we believe are reliable indicators of equity market stress based on our 30-year history of studying stock price volatility. We believe these indicators are well suited to identifying signs of market stress. You can use the monitor to gain insight to market risk regimes, contextualize beta risk management and complement your conventional risk metrics.
Learn more about the Intech Equity Market Stress Monitor®. Download an eBook that serves as a guide to the monitor.
VIX® is a registered trademark of the Chicago Board Options Exchange, Incorporated (“CBOE”). The VIX index methodology is the property of CBOE.