Broad Based Index Volatility – Comparing and Contrasting

By CBOE

CBOE Volatility Index or VIX is recognized globally as a measure of the US market’s expectations of future volatility. There are now multiple indexes that utilize the VIX methodology to measure expectations of thirty-day volatility from an underlying market. Markets as diverse as India, Australia, and Hong Kong now use the VIX methodology to calculate and quote their own volatility indexes. Additionally, CBOE calculates the China ETF Volatility Index, which uses pricing from options on the iShares China Large-Cap ETF (FXI) which trades in the US. A quick summary of the volatility indexes that will discussed in this article appear below.

Each of these markets have their own fundamental characteristics. However, the volatility indexes associated with each market actually have the same sort of inverse relationship with the market that we have come to expect from VIX relative to the S&P 500. The table below shows the correlation between each underlying market and the corresponding volatility index from March 2011 through July 2017.

Note all of the volatility indexes in the table above have inverse relationships with their underlying market. But also note that the negative correlation between VIX and the S&P 500 is much closer to -1 than the other pairs of indexes. For markets that are small than what is represented by the S&P 500, if there is a country specific event such as an election or important economic number being released, the implied volatility of the options on the underlying market will rise in anticipation of the pending event. After the anticipated event has passed implied volatility based on option pricing may drop, regardless of what the underlying market does. This sort of behavior results in a little be less of a negative relationship for the markets listed above.

Global volatility tends to rise and fall in sync and this shows up when comparing the correlation of each of the volatility indexes. The table below shows the cross correlations of the different volatility indexes discussed in this article. Note all correlations are positive, just to different degrees.

The highest correlation is between VXFXI and VHSI which is not surprising since they both represent Chinese markets. NVIX seems to behave a little more independently relative to the other volatility indexes in this part of the world.

Just about every major market index in the world now has some sort of volatility index calculated and quoted using underlying option pricing plus the CBOE Volatility Index methodology. For the most part these indexes have an inverse relationship with the underlying market, but global volatility expectations do appear to be positively correlated. When there is a specific potential economic or political event on the horizon for a regional market the result can be a rise, then fall of option implied volatility.