Volatility is back in the equity markets—and high time, too.
The VIX index maintained by the Chicago Board Options Exchange (CBOE) is commonly described as a fear gauge. It measures the implied volatility of a group of options traded at CBOE.
The VIX tends to rise when traders feel fear in the pit of their stomachs. It is now at a four-year high, and could perhaps go up further in the coming days if the current turmoil in the financial markets persists.
The volatility index has doubled in recent weeks, though it is nowhere as high as it has been known to reach when there is true-blue panic in the markets.
The spike in the VIX is welcome. Volatility was comatose these past few years as investors started behaving as if risk was no longer a matter of worry. The explosions in the US sub-prime market have jolted them out of their complacency. The VIX’s rise shows that risk is a serious issue once again.