All four of the S&P 500 oriented volatility indexes dropped last week as we finally got the September FOMC meeting behind us. At this point there are two more meetings in 2015. What I find interesting is VXV, which is a measure of 3 month expected volatility held up more than the other three indexes. It just so happens that 3 months from this week is also the final FOMC meeting of the year.
In the ETN space, VXX, UVXY, and TVIX gave up more of the recent gains despite the VIX curve remaining in backwardation. This occurred despite these funds shifting their exposure from September and October to October and November VIX futures.
During times of volatility, like the last four weeks, I’m kept busy fielding calls about VIX. One caller asked if the derivatives associated with VIX (futures, options, and ETPs) was causing the elevated VIX levels we have been experiencing lately. I have never seen any evidence of this, but decided to do some investigating just to be sure.
I was specifically asked about the period of time before the financial crisis versus recent history. The question I got was basically, “Is VIX higher since the great financial crisis because people are now trading derivatives based on VIX?” I decided to separate VIX into three periods and then play with the data. The first period is the 17 years from 1990 to 2006 (pre-crisis), the second is 2007 – 2009 (the financial crisis), and then 2010 through the present (post crisis). The average for VIX from 1990 to 2006 is 19.06, from 2007 to 2009 it is 27.26, and from 2010 to this past Friday the average is 18.30. Even if we include the second half of 2009 as part of the ‘post crisis’ period the average for VIX is only 18.78 – still lower than the 1990 to 2006 period of time.
I also took another approach to comparing before, during and after the financial crisis. Since the first day of 1990 there have been 34 streaks where VIX closed over 20.00 for ten or more days. As of Friday VIX had closed over 20.00 for 20 straight days and that current streak is highlighted on the table below.
The longest streak of days with VIX closing above 20.00 ran 331 trading days from August 18, 2008 to December 21, 2009. The next six streaks on this list occurred long before the financial crisis. Of the 34 streaks on this list 23 occurred during the 17 year period leading up to the crisis or about 1.35 per year. There were five during the crisis period from 2007 to 2009 and there have been six since the crisis which is an average of once a year. The streaks have been less frequent in the post financial crisis period than before the calamity that was 2007 through 2009.
After doing some very brief number crunching, it appears the question should have been, “Is VIX lower since the great financial crisis because people are now trading derivatives based on VIX?” It sure appears that periods of higher equity market volatility have been less frequent in the past few years.