Posts Tagged ‘intraday moves’

Volatility and Wide-Range Days with Neutral Closes

Volatility and Wide-Range Days with Neutral Closes

Courtesy of Bill Luby at Vix and More

A reader notes:

The VIX tends to move inversely with the market on a day-to-day basis. Market up = VIX down and market down = VIX up. That’s all fine and dandy MOST of the time (I’m stating the obvious here) because of expectations about the asymmetry of volatility during bull versus bear moves. But how do we square moves like Monday (05/17) when, even though the close-to-close change in the market was very small, the intraday move was very large (with implications re: continued high volatility), yet the VIX still fell? Does the VIX (from a statistical correlation perspective) only care about close-to-close changes? Isn’t that a bit shallow?

This is an excellent comment and set of questions.

In terms of background, consider that measures of volatility based on actual changes in the price of the underlying break out into two camps:

  1. those that focus on close-to-close price changes and ignore/understate intraday price movements (e.g., historical volatility
  2. those that include intraday price variations in their calculations (e.g., average true range)

Here is where an example might help to clarify things. Take the recent ‘flash crash’ of May 6th. Even though the close-to-close change in the S&P 500 index (SPX) was a very large 3.24%, the intraday range was a whopping 8.73%. So which was the better measure of volatility on that day? My guess is that anyone who was watching the markets as they crashed would vote for the 8.73% move, as things certainly felt more like the panic of October 2008 than the relative calm of October 2007.

Given that implied volatility values such as the VIX are calculated directly from options prices, in theory the VIX does not strictly account for intraday prices. Also, technically the VIX is the market’s forward estimate of close-to-close volatility in the SPX. So from a pure statistical perspective, the VIX does indeed have a narrow close-to-close time horizon and is blind to intraday fluctuations in prices.

In practice, however, a wide range day with a relatively benign close-to-close number will typically reinforce the idea that the market is ripe for large volatility moves, even if these moves may cancel each other out on intraday basis. In my opinion, mapping these changes in price to changes in volatility is…
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