By Eben Maré, Head: Fixed Income at Absa Asset Management and Associate Professor, University of Pretoria
“What kills a skunk is the publicity it gives itself” – Abraham Lincoln
Investors typically equate volatility (or more technically the standard deviation of asset returns) with risk. In this regard, the CBOE Volatility Index, better known as the VIX, has become a well-known gauge of an investor’s risk appetite or fear.
The VIX is calculated on the basis of a range of options priced on the S&P500 equity index. The index offers an indication of the 30-day volatility implied by the options market (referred to as implied volatility).
There are a great many uses for the VIX. Investors base asset allocation decisions on the VIX and try to determine universal relationships between currencies, fixed income assets, and equity markets based on movements in the VIX.