26 October 2009

VIX Stirring From its (Relative) Slumber


Do I detect just a modicum of concern of this market via the VIX?

Yes we are off a few points today and this invariably causes at least a bit of a rally in the VIX. Nothing startling there. But watching VIX over the last few days I was beginning to wonder whether they were going to plough volatilities into the mid teens, come what may.
We all parrot the standing wisdom that VIX is mean reverting and I certainly think that's true. The nature of volatility and how it is measured makes it deterministically so... with an infuriatingly chaotic dualism so we can never really time volatility except by accident.

('cept when I nail it right on the day. That is unquestionably skill Roll Eyes Grin)
What is this mean VIX must revert to anyway? Having not really paid attention during may statistics classes, I never realized there was more than what type of mean. Sparing me the embarrassment of intellectual incapability of calculating other sorts of mean, I am quite sure it is the arithmetic mean of some defined lookback period, AKA a simple moving average.
Easy enough to work out, but even that simple task has been wrested from us via software.

But it begs the question, what lookback period should be used to determine the mean? In other words, what length moving average?


There is a school of thought that uses the 10DMA. Fair enough... whatever. But the lookback period used can deliver vastly different "means". Also the mean is a moving target. The mean today scarcely resembles the mean 8 months ago. By the ten day measure, VIX is probably already overbought (whatever that means). By other measures, there is still some reverting to do.

Whatever the case, the VIX mean is heading lower, unless Roubini's 2nd crash scenario unfolds; and don't see that happening in the near future.

What I'm basically saying in an extremely convoluted way is - VIX has finally bounced, but I have no idea where it, and the market, is going next. But my guess is some degree of retracement.

Discuss this, and other topics at International Stock Forums.


5 comments:

Mark said...

I actually think this is an excellent chance to unload VEGA. I have a good bet for you. I think we see 17 in the VIX before we see 32. Care to have a wager?

Wayne said...

Hi Mark.

32 eh? Hmmmm I doubt we see that this year. With the Santa Claus seasonal coming up, 17 is far more likely.

What odds are you offering me?

:)

Mark said...

Ill let you use 30 if you would like instead. Before we come up with odds, we have to come up with some sort of embarrassing non-monetary bet

Wayne said...

Hi Mark,

30 eh? Just for fun, I'll take that bet providing that the embarrassing non-monetary payout is not too... ummmm, embarrassing. (Seeing as I'll probably be the one paying out.

But as 17 before 30 is odds on, yours will have to be reeeeaally embarrassing. :)

mark said...

done and done