Volatility Measures In Agreement

Today's Wall Street Journal contained an article discussing the VIX's recent and longer-term performance.

Per the article,

"The most popular proxy for market fear is the Chicago Board Options Exchange's Volatility Index, or VIX. It peaked at nearly 81 about two weeks ago, roughly four times its historical average of about 20. Crescendos of fear sometimes mark stock-market bottoms, and on cue, the VIX has fallen sharply since then, and stocks have rallied."

The piece goes on to discuss longer term performance of the series,

"Still, the VIX's closing price Friday of 55.84 was unprecedented before October. Its 50-day moving average, which indicates the trend, is still moving higher; values for days now falling out of the sample were in the 30s. The VIX has exceeded 30, an unusually high level, for the past 54 trading days.

To find volatility so high for so long, one has to look long before the VIX's invention in 1993 by Robert Whaley, now a finance professor at Vanderbilt University.

Christopher Finger, European head of research at RiskMetrics Group, has a model that crunches returns on the Dow Jones Industrial Average into something approaching a VIX going back to 1900. According to his estimates, volatility has hit higher peaks twice since 1900, at the crashes of 1987 and 1929. But in terms of persistently high volatility, only the 1930s were worse than today. Other analysts' models back him up or suggest the current sustained volatility is actually the worst in history."

It's quite comforting to know that our own proprietary volatility measure has displayed the same characteristics. I wrote about the behavior of our own volatility measure in this post in October. As I noted in this passage,

"Seeking historical context, I applied our measure to the S&P500 from 1950 to the present in additional research conducted just last month. That nearby chart shows that the crash of 1987 was even more volatile than our current market situation- so far.

Extending the analysis back to 1928, via the Dow Jones Industrial Average, I found that the market volatility for that crash exceeded even that of 1987.

All of which is to state that the current equity market volatility is the third-highest in 80 years,"

we, too, found what Mr. Finger discovered.

Reviewing the charts I published in the prior, linked post, and the one nearby, I would conclude the same, again, as Mr. Finger, regarding volatility persistence.

While the 1987 crash required several months for volatility to fall to a long-term, healthy value, it fell fairly significantly quite soon after the October crash.

Not so in 1929. In that case, as the chart shows, the decline in volatility was much more gradual.

That's what we are seeing this time, too. In fact, rather than a normal-curve like decline, the current equity market volatility has built a 'shoulder' of fairly constant, high volatility since the second week of last month.

Thus, as I noted to my partner recently, no two market crises are exactly alike.

Despite the rather somber conclusions shared by our volatility measure and the VIX, and another party's extension of a VIX-like volatility measure further back in time, it is, never the less, pleasing for us to see our own findings confirmed by other volatility measures.