Rising uncertainty in the Indian stock market as a result of the 50 per cent jump in the 30-share sensitive index, Sensex, since March and uncertainty surrounding the election results have led to a rise in the Volatility Index (VIX) in India to 50. Its US counterpart at the Chicago Board Options Exchange, however, (CBOE) touched a seven-month low of 33 on May 5.
It is also known as the fear index that reflects uncertainty and volatility expected in the market. The index touched an all-time high of 89.53 on October 24, 2008 on the CBOE, as the uncertainty in the global financial markets rose with the fall of Lehman Brothers and rise in liquidity crunch worldwide.
While the fear index in India moved in line with the US’ between September 2008 and March 2009, the variation in the movement of the two indices has become visible since end-March when it went below 30. It started to rise since then as a result of the steep volatility in the Indian market and uncertainty around the election results. It closed at 50.53 on May 5, much above its March 25 level or the September level when it was trading at around 30.
“The Indian market has rallied since March and market participants expect a correction as it is in an overbought position,” said Aseem Dhru, CEO, HDFC Securities. “Uncertainty has also gone up as the election results are approaching.”
The VIX represents the annualised change that the market expects in the index over a 30-day period. It is linked to the pricing of the “call” and “put” options in the futures market. The higher the price of the option, the higher the volatility and higher the index value. The higher the value of VIX, the higher the volatility expected and costlier are the options. Investors need to pay a greater premium to insure them against the high risk.