Understanding the VIX

Abstract

In the recent weeks of market turmoil, financial news services have begun routinely reporting the level of the CBOE's Market Volatility Index or "VIX", for short. While this new practice is healthy in the sense that investors are asking for more information in helping to assess the state of the current economic environment and to guide through turbulent waters, it is important to understand exactly what the index means in order to fully capture its usefulness and to avoid misunderstanding and misconception. The purpose of paper is to describe the VIX and its history and purpose, and to explain how it fits within the array of indexes that help describe where the economic stands relative to other points in recent decades.

Keywords: VIX, market volatitility, fear gauge, barometer of fear

JEL Classification: G13, G14