Market Volatility Falls To An 8-Month Low

From Ian Ayres at the Freakonomics Blog on December 24, 2008:

One of the most important but underreported financial indicators is the CBOE’s Volatility Index (^VIX), which measures the market’s expectation of future volatility in stock prices. (The CBOE has written a nice technical paper describing how it is calculated here.) Traditionally, the annualized volatility of the S&P 500 has been 20%, but in both October and November the VIX reached an apocalyptic 80%. The huge drop in stock prices is bad, but it would be a lot better if the market thought that the major gyrations were mostly in our past. So the good news is that the volatility index has retreated to 45%.

Now, 45% is still more than twice what it “should” be. But it’s at least moving in the right direction. When it drops below 30%, it will be a strong indication that the market correction is complete and we’re back to business as usual.

MP: The CBOE Volatility Index closed today at an 8-month low of 32.45%, the lowest level since mid-September 2008 (see chart above), and more than 48 points below the November 20 peak of 80.86. If Ian Ayres is correct, market volatility is within a few points of the 30% reading that will signal that the market correction is complete.

About Mark J. Perry 262 Articles

Affiliation: University of Michigan

Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.

He holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University in Washington, D.C. and an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota.

Since 1997, Professor Perry has been a member of the Board of Scholars for the Mackinac Center for Public Policy, a nonpartisan research and public policy institute in Michigan.

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