Why is VIX a fear gauge?

Peter Carr

Research output: Contribution to journalArticlepeer-review

Abstract

VIX is a widely followed volatility index constructed from the market prices of out-of-the-money (OTM) puts and calls written on the S&P500. VIX is often referred to as a fear gauge. While the market prices of OTM puts clearly reflect the fear that the S&P500 will drop, about half of the options used in constructing VIX are actually OTM calls. The market prices of these OTM calls clearly reflect greed rather than fear. In this note, we offer several explanations as to why VIX can properly be regarded as a fear gauge.

Original languageEnglish (US)
Pages (from-to)179-185
Number of pages7
JournalRisk and Decision Analysis
Volume6
Issue number2
DOIs
StatePublished - 2017

Keywords

  • VIX
  • fear gauge
  • volatility

ASJC Scopus subject areas

  • Statistics and Probability
  • Finance
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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