Volatility Index: A Measure of Potential Fluctuation

There are many factors affecting the movements of assets prices in the financial market. The amount of risks attached to the size of potential change in the value of assets is called volatility. This measure of uncertainties is also measured by an instrument called the volatility index, a gauge which is also popular as a key measure of huge stock markets like Dow Jones and NASDAQ and other commodity markets.

Tracking Uncertainties

The up and down movements in the market represent volatility. If the news tells that there is a rising volatility in the market, it means that the value of the financial instruments can change dramatically in an instant.

Throughout the history of the financial market, equities have a roughly 20% of volatility per year and 5.8% each month. But as the international trade and the global market progresses, the rate of volatility keeps on changing.

Talking about the measurement of volatility, the best and the most ultimate gauge of measuring market risks is the CBOE Volatility Index, with VIX as its ticker symbol. This is constructed to track the expected 30-day volatility of a given asset conveyed by option prices.

The VIX was initially introduced in 1993 and was only utilized to track the amount of related risks in the eight sectors of the S&P 500 at the money-put and call options. After ten years, it was then used in the broader index.

If an asset has a value of 30 in the volatility index, it is more likely to have more volatility in the market resulting from investors’ fear. If the value is less than 20, then investors are more complacent in the market.

The volatility index was at its highest level during the financial crisis of 2008. But just as last June 9, the index recorded its lowest level since December 27 1992. The CBOE Volatility Index closed at 9.37 as a result of the hung parliament in United Kingdom. It was the 17th time the index hit below 10-mark.


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