India VIX: The Stock Market Volatility Index

/ M. Pattabiraman / @pattufreefincal / 1 Comment

Published: March 10, 2014 at 12:01 pm

Last Updated on September 23, 2020

As a student of market volatility, my eyes popped out in interest to learn that we have index that gives an idea about market volatility – the India Vix. India VIX is a measure of how volatile the market is expected to be over the next 30 days. Its calculation is described here in extraordinary detail.  It is measured using Nifty Option prices  (why do I keep reading this as Nifty onion prices?!). Here is a good non-mathematical read: How is India VIX calculated?   

  • It is reported as a percentage.
  • A high value corresponds to high volatility in the next month and a low value corresponds to low volatility over the same period.
  • It is not a buy or sell indicator.
  • It is a short-term indicator of investor ‘fear’ and confidence
  • As a projection, it is subject to assumptions and approximations and must be used with caution.
  • India VIX is calculated based on the methodology outlined by the Chicago Board Options Exchange with some modifications made for use with the Nifty order book. They track US market volatility with VIX.
  • Here is how the VIX (US) correlates with its underlying index the S&P 500.
VIX
Picture courtesy: Chicago Board Options Exchange
  • Notice that when VIX is low and does not fluctuate too much, investor confidence is high and the Index rises.
  • Sharp drops in the index increase the fluctuations in VIX.
  • Historical data for India VIX is available only from 2nd March 2009.
  • Here is how India VIX looks like when plotted alongside the Nifty.

India VIX vs. Nifty

  • There is a good 81% negative correlation between the movement of the Nifty and India VIX. That is, Nifty highs corresponds to VIX lows and vice-versa.
  • Again a decreasing VIX with low fluctuations can be taken as a sign of positive outlook and a market rally at least in the short term due to increase in investor confidence and decreasing fear.
  • The high volatility in 2011 is a result of global economic fears and high interest rates.
  • The sharp VIX peak in Aug. 2013 corresponds to the sharp drop in the value of the Rupee.
  • The volatility has been steadily decreasing for close to two years now.
  • Does it mean this is a good time to invest? The VIX does not exactly tell you that. However, it does tell you that the nerves are calming down, and the confidence in the India-Growth dream is growing.  Therefore, from that point of view, yes it is a good time to be in the market!
  •  Here is how the India VIX and Nifty P/E have evolved

India VIX vs. Nifty P/E

  • An upward spike in India VIX seems to correlate with a dip in NIFTY P/E. However, the correlation between the two is quite poor (-12%). This is to be expected as P/E considers earnings over the last 12 months.
  • Curiously in late 2010, when P/E was close to 25 a clear ‘sell’ indicator, the value of India VIX was ~ 20% a reasonably ‘low’ volatility.
  • However, India VIX fluctuated rapidly in this period.
  • This suggests that, for the long term investor, fluctuations in India VIX over a period, rather than the daily VIX value is a more useful indicator of market volatility.
  • Long term trends help assure ourselves of the benefits of staying invested.
  • In hindsight, past data of a future predictor reveals more that its daily value!
  • Investors can now diversify their portfolio or hedge portfolio risk with market volatility! India Vix Futures
  •  It is good to know that confidence in the market is growing.  Let us hope it lasts … and spills over to the retail investor.
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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
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