Volatility indices gain, nearly $1.8 tn of m-cap wiped out in last 5 days

The volatility indices of developed markets, a key gauge to measure risk among investors, are finally coming out of their complacency after remaining in hibernation for almost a year. The CBOE VIX index, widely known as the fear index, has advanced as much as 47% since the beginning of October, and is now trading at the level of 24.8, the highest since July 2012. It derives its value from the prices paid for options on the S&P 500 index.

Volatility indices in other markets such as Germany, Britain and Hong Kong have scaled up by as much as 30-40% during the past one month. Volatility indices are gaining as investors are pricing in the direction of the US Federal Reserve policy amid weakening global growth.

For investors, the direction of VIX matters as these fear indicators move in the opposite direction to that of the benchmark equity market index. As volatility indices are surging across the world, global equities markets are beginning to feel the heat, and nearly $1.8 trillion – equivalent to India’s GDP – has been wiped out in the last five days.


Indian equity market and its volatility indicator, or India VIX, has been remarkably stable in the face of the global rout. In the past five days, when the US markets witnessed its biggest 3-day loss seen since 2012, and most of the developed markets slipped below their 200-day moving average, Indian markets recorded a marginally positive return of 0.13%.

India VIX gained a mere 11.5% since the beginning of October. Analysts believe India VIX is showing lower reading as it has under-priced the risk from the lesser number of trading holidays on account of Diwali. The number of days left for expiry of an option is one of the key constituents to determine the fair value of the option.

Investors can gauge the amount of risk creeping into the markets on the basis of India VIX and accordingly fine-tune their respective portfolios. Historically, India VIX has had a negative correlation of 0.8 with the Nifty, which means if one of these variables is going to increase, then there's a fair chance of the other variable to go down.