The Econophysics Blog

This blog is dedicated to exploring the application of quantiative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences. The focus of this blog will be on tools, methodology, and logic. This blog will also occasionally delve into philosophical issues surrounding quantitative finance and quantitative social science.

Wednesday, January 16, 2008

VIX Shows Greater Sense of Uncertainty in the Markets

I just did some analysis of VIX (the index of the implied volatilities in S&P 500 options created by the Chicago Board of Options Exchange) data from 2004 to this Tuesday (15 Jan. 2008). The VIX is widely considered to be the one of the best indicators of the market's sentiment on volatility, risk, and uncertainty.

If you look at the chart I created (see below -- click it to see a larger image), you can clearly see that -- from late Summer of 2007 -- the market's consensus on volatilty has been elevated to a substantially higher level. Another thing that is striking from this chart I created is how 'jumpy' risk is. Not only are there sizable spikes but there seems to be some anecdotal evidence of what econometricians call 'regime switching.' In this case, the regime we have switched to is that of higher volatility and uncertainty in the marketplace.

These upward jumps and spikes in risk seems to coincide pretty well with the credit crises and other negative economic and financial news. Of course, this isn't a careful study of the data, but I thought I would offer up a tiny bit of real world financial data analysis to readers of this blog.

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