Equity volatility index reflects investor outlook

Standard & Poor's (S&P) and the Australian Securities Exchange (ASX) are about to launch an equity volatility index that reflects investor sentiment about expected volatility in the S&P/ASX 200.

The S&P/ASX 200 VIX index commences tomorrow and S&P stated that it would reflect expected equity market volatility over the next 30 days. A high volatility level would indicate a market expectation of large changes in the S&P/ASX 200 and therefore investor uncertainty.

"The new volatility index will provide investors, financial media, researchers and economists with a means to gauge the level of volatility anticipated in the Australian equity market over the near-term," said ASX general manager, equity markets, Richard Murphy. "More specifically, because the S&P/ASX 200 VIX is a forward looking volatility measure, observers of the index will have insight into the degree of uncertainty among investors and their expectations regarding the magnitude of future movements in the local equity market."

S&P stated that the index would reflect expected equity market volatility over the next 30 days by using settlement prices for S&P/ASX 200 put and call options to calculate a weighted average of the implied volatility incorporated into the options. The calculations would use the Chicago Board Options Exchange (CBOE) proprietary methodology, which CBOE executive vice president Richard DuFour said had become the recognised standard for measuring implied volatility.

S&P stated that the S&P/ASX 200 VIX would initially be available as an end-of-day index from the ASX, although the ASX would consider making the index available in real-time and launching derivative products over the volatility index at a later date.