I decided to study the India VIX and its behaviour when the markets hits a top. Thanks to Natasha for pointing me to this study. First of all what is the India VIX?
Volatility Index is a measure of market’s expectation of volatility over the near term. Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualized volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.
India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book using cubic splines, etc.
This is as per NSE India site. For more information on VIX, refer this link:
http://en.wikipedia.org/wiki/VIX
1. Looking at the last 4 rallies, the VIX when the market has hit the top has progressively decreased.
2. High VIX readings mean investors see significant risk that the market will move sharply, whether downward or upward. The highest VIX readings occur when investors anticipate that huge moves in either direction are likely. Only when investors perceive neither significant downside risk nor significant upside potential will the VIX be low.
3. Each of the subsequent VIX reading at the top has been in the range of 82-85% of previous VIX reading at the top. Right now we are at the very low end of the all-time range of VIX. This might also mean that the short term top is close by.
All these studies can prove to be academic exercises also. Markets have a mind of their own.
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