Throughout this year (2017) I have occasionally been showing the chart of how many times the VIX index has closed below 10. Before this year closing values below 10 were quite rare, but this year has radically changed that. Let’s go ahead and see the updated chart. (lines in blue are 2017)
So clearly volatility is smashing historical records here, but something that I sometimes hear when we talk about this is:
“Yeah but that’s the new VIX calculation. The old VIX calculation saw more low values in the past.”
January 19th, 1993: The VIX Index officially launched. It’s calculated based on near the money options on the S&P 100.
September 22nd, 2003: The “new VIX” launches with a couple notable changes:
1) It’s now based on S&P 500 options instead of S&P 100.
2) It uses a broader range of option strike prices instead of just near the money options as before.
So after the “new VIX” launched in 2003 the Chicago Board Options Exchange (CBOE) continued to disseminate the “old VIX” values under the ticker VXO. So we can still get daily VIX and VXO numbers to this day, but the CBOE has also reconstructed VIX and VXO prices going back further.
– We have reconstructed VIX prices going back to 1990
– We have reconstructed VXO prices going back to 1986
The new VIX Index methodology does give slightly different readings than the old VXO methodology, but actually you can see we’re not talking big changes here:
Typically the old VXO (red line) goes a little higher on volatility spikes and dips a little lower when volatility is depressed, but overall it’s very close.
Here’s the VIX index closes below 10 going back to 1990:
That’s a heavy concentration in 2017. In fact that’s 82% of all the lowest closes in the last 27 years happening just this year. But is the “new” VIX methodology to blame for this?
Here’s the VXO index closes below 10 going back to 1986:
No it’s not. The quantity of closes below 10 is a lot higher, up to 187 for VXO and only 49 for VIX, but the ratio is still similar.
That’s still 78% of all low values in the last 31 years happening in just 2017. Anyway you slice it, 2017 is off the charts with respect to low volatility.
I definitely think the new VIX methodology is better. It’s based on a more diversified index and off a wider range of option strike prices so the changes the CBOE made in 2003 were improvements. However to attribute any of this recent bout of low volatility to the difference between VIX and VXO just isn’t accurate.
And see that volatility spike in Oct 87′? To be continued…
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