Well, I saw a post by Pablo Triana at Wilmott the other day, and one should be clear what to expect from the VIX ghost, I excerpt here for reference:
When the CBOE changed the calculation method in 2004, the VIX became the theoretical price for a type of derivative contract known as “variance swap”, obtained through very sophisticated mathematical ruminations (borrowing from prior work by Goldman Sachs quants). The new VIX does not assume the use of Black-Scholes in real life, and does not reverse engineer from a model. While the old VIX could somehow claim to represent implied volatility (if traders are using Black-Scholes), and thus be a window into traders' opinions, even if not an exact mirror into their volatility expectations, the modern VIX is not even implied volatility. It is not directly implied from option prices. Rather, the VIX is now linked to those prices through a mathematical sleight-of-hand, almost accidentally. When market option prices change, the VIX will change, but we can't imply that the VIX would reflect any precise information (such as volatility expectations) that those prices may or may not contain. There simply is no reverse engineering going on. No direct, incontrovertible peeking into traders’ minds here. The VIX is a wholly opaque and very dubious guide to the opinions and feelings of financial pros. If we see the VIX explode (tumble) all we can say with honest certainty is that the prices of some S&P 500 options are climbing (declining) quite steeply. We can't honestly imply anything about fear or exuberance levels along Wall Street.
Sadly for those yearning for precision-promising certainties, the VIX has never measured what we were told it could measure. By endowing it with fake powers, we are letting a deceitful ghost influence our markets.
No comments:
Post a Comment