The Volatility Index

Keeping on track with my relentless drive to try and pull down Beta as an overstated tool for decision making, today I will discuss something that derives its essence from Beta or Market Risk, but provides a much more accurate and wholesome picture. The National Stock Exchange's Volatility Index (VIX) is tracked to find the Market Volatility. It is based on the Nifty 50 and is used to calculate the expected market volatility over the next 30 calender days.

A high VIX indicates market fear while a lower value indicates that the markets are cold. The thumb rule for VIX is:

20s indicate complacent market

mid 30s to upper 40s indicates market fear

above 50 indicates panic

Between July and October 2008 the VIX crossed the 70 mark 5 times.

Currently the VIX is at 51 which still indicates a state of panic in the market. This coincides with the fact that it has been so difficult for Sensex to break the psychological barrier of 10000 and for Nifty to break the 3000 levels.

Posted by Rahul