The Evolution Of The VIX

Volatility is notorious for clustering in the short-term, mean-reverting in the medium-term, and settling into multi-year macrocycles over the long-term.  I have chronicled each of these themes in this space in the past.

Apart from volatility, I have also taken great pains to talk about the movements of the VIX, which is one of the most famous instances of implied volatility and represents investor expectations about future volatility in the S&P 500 Index for the next thirty calendar days.  Surprisingly to some, the VIX and volatility (which generally refers to realized or historical volatility), while correlated, are very different animals.  Not only are these two very different, but their evolutions have also been very different as well.  Volatility, which has a much longer history, seems to exhibit the same traits that it has exhibited throughout its lifetime, with relatively modest tweaks around the edges from time to time.

The same cannot be said for the VIX.  One thing about the VIX that has changed in the three decades or so of VIX data is the speed at which the VIX has moved up and down.  In a nutshell, VIX cycle times have shortened dramatically.  In other words, the VIX now has a tendency to spike much faster and mean-revert downward much faster as well.  This phenomenon has been ongoing for the past decade or so, but it became more pronounced following the Brexit craziness – or at least the first chapter of the Brexit craziness.

One way you can see how the changes in the VIX have differed in the changes in the volatility of the SPX is to look at volatility spikes.

In the first graphic, below, I show the number of days per year with 2% and 4% moves in the SPX going back to 1990.  Take note of the ebbs and flows in volatility and the clustering of volatility around the dotcom bubble and again around the 2008 Great Recession.

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Disclaimer: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this ...

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