Thirty Volatility Indexes: Worldwide Tools to Gauge Sentiment and Diversify Portfolios

Abstract

In the two decades since the 1993 launch of the widely followed Chicago Board Options Exchange (CBOE) Volatility Index (VIX), dozens of new volatility indexes have been introduced. This article provides an overview of 30 volatility-related indexes; 25 of the indexes are indicators that gauge investor sentiment regarding expected volatility of traded instruments such as commodities, interest rates, currencies, or worldwide stock indexes, and 5 indexes are designed to serve as benchmarks for investable performance of strategies that use VIX futures or options. Volatility indexes are used as market signals in asset allocation programs. Over the past 14 years, many investors have struggled to cope with multiple bear markets for stocks, higher correlations among many investments, and lower risk-adjusted returns for their portfolios. Investors now use long-volatility strategies with the goal of diversifying their portfolios and short-volatility strategies with the goal of enhancing risk-adjusted returns. Increased interest in volatility indexes is reflected by the fact that average daily volume for VIX options rose from 23,491 contracts in 2006 to 442,959 in 2012.