Market volatility is defined as the statistical measure of the index representing that market to rise or fall sharply within a short period of time. The major characteristics of a volatile market are large price fluctuations and heavy trading, either buying or selling.
The causes of market volatility are many and varied and while individual assets might be affected by certain events or announcements, volatility across an entire market or of a global nature, as seen since the massive selloff started in China this week, need events of national importance as a trigger.
The Chicago Board Options Exchange Volatility Index (CBOE Vix) is a measure of the market's expectation of 30 day volatility and is calculated using the implied volatilities of a wide range of the S&P 500 index options. The CBOE Vix is a widely used measure of market risk and investor sentiment and is referred to as the investor fear index. There are three different volatility indexes, the VIX which tracks the S&P 500, the VXN which tracks the Nasdaq 100 while the VXD tracks the Dow Jones Industrial Average.
The last week saw some enormous moves in the markets, both in prices and volumes of shares traded, but the biggest mover of the week was the actual market volatility index.
The VIX went up for 5 successive days, doubling during the course of the week. The index, which rose by 118%, recorded its biggest weekly increase on record, according to Peter Wells of FT.com
Also, the VIX, which stood at 12.83 on 14 August and moved to 28.03 on 21 August, started off on a low base which should be taken into consideration when looking at the percentage increase. Close of day on Tuesday saw the VIX standing at 37.77, an increase of 34% in just two days.
The 15.2 points the index rose week-on-week is the third biggest weekly increase on record in terms of points.
Despite the big increase week-on-week, the index is nowhere near the levels seen during the height of the financial crisis in 2008 which saw the VIX peak at 59.89 and more recently in September 2011, when it reached 42.96.
The reasons for the big increase in market volatility at the moment are more difficult to define with Ben Branch, professor of finance with the Isenberg School of Management, attributing it to a number of factors, particularly to events in China.
He said, “That's the trigger that impacted the market”, adding that it's not likely to devastate markets in the U.S. although they will continue to be volatile.
Professor Branch added, “There’s the decline in their rate of growth which has been rapid and the country needs to switch from an export based to a consumer based economy. China is a big importer of raw materials and as the economy there weakens, it has ramifications for the rest of the world.”
Setting investors’ fears at rest, he also said that while the market crash we witnessed over the last few days was reminiscent of the days of the Great Recession, the current U.S. economy is not the U.S. economy it was then.
“This is dramatically different from that. Nobody is forecasting a recession.” he concluded.