Athanasios P. Fassas - Implied Volatility indices

Taxonomy of implied volatility indices

Equity indices Volatility Indexes

Stocks and Equity ETFs Volatility Indexes

Currencies Volatility Indexes

Commodity Volatility Indexes

Interest Rates Volatility Indexes

Volatility of Volatility Indexes

The evolution of implied volatility indices

Taxonomy of implied volatility indices

In this note, we review all publicly available implied volatility indices per asset class. In particular, we include totally 104 publicly available indices and additionally 15 indices that have been publicly available in the past, but are currently discontinued. The majority of the volatility indices that are currently publicly disseminated are based on equity markets (30 indices), while there are 12 indices covering individual stocks and equity ETFs. Regarding other asset classes, there are 25 commodity-based, 18 interest rate-based and 17 currency-based volatility indices. Finally, there are 2 volatility of volatility indices.

An implied volatility index reflects investors’ best collective estimate of the realized volatility of the underlying asset over a specified future period of time (usually the next thirty calendar days). Since the level of the volatility index depends directly on option prices, it embeds any positive or negative event that has a potential impact on the underlying asset. Hence, a negative (positive) shock that raises investors’ bearish (bullish) outlook will result in an increase (decrease) of put options prices and a concurrent decrease (increase) of call options prices. Now, the net effect on the volatility index (if it will eventually rise or fall in value) depends on the relative size of these two option prices moves. As a result, a volatility index reflects the fear or exuberance of a diverse set of investors, who participate in the options market and thus, is also an accurate estimate of market sentiment.

There are generally two ways of calculating a volatility index; the first one is based on the Black-Sholes at-the-money implied volatilities, while the second method employs a model-free variance swap-based calculation. The estimates of the two methodologies are well correlated, as they both represent a market derived estimate of the future realized volatility of the underlying asset.

A lot has happened in the implied volatility indices landscape since 1993, when the original VIX was introduced. Today there is no single major global equity market without a respective volatility gauge, while implied volatility indices now exist for other asset classes (currencies, fixed income, commodities and other). In the following sub-sections, we review all publicly available implied volatility indices per category.

IV indices

Equity indices Volatility Indexes

In addition to the benchmark CBOE Volatility Index (VIX), which was originally introduced in 1993 and drastically revised in 2003, the Chicago Board Options Exchange (CBOE) calculates further indices tracking the S&P500 implied volatility over several different time horizons (ranging from 9 days to one year). CBOE also calculates implied volatility indices on other three major US benchmark equity indices: the Dow Jones IA Volatility Index (VXD), the Nasdaq-100 Volatility Index (VXN) and Russell 2000 Volatility Index (RVX). Finally, CBOE continues to calculate and disseminate the original volatility index (introduced back in 1993) based on at-the-money- implied volatility of S&P100 index, which is now called the CBOE S&P 100 Volatility Index (VXO).

Outside of the US markets, there are now several implied volatility indices that track the market expected volatility of other benchmark equity indices. The first exchange to follow the example of CBOE was Deutsche Börse, which in 1994 introduced implied volatility indices based on options on the German benchmark index DAX-30. The latest equity volatility index was introduced by Tel Aviv Stock Exchange in July 2019, the VTA35 Index representing the implied volatility level (according to the Black & Scholes model) in options on the TA-35 Index. Today we report totally 18 volatility indices based on global equity markets (in Europe, Asia, South Africa, Australia and Central America).

IV indices

Stocks and Equity ETFs Volatility Indexes

CBOE also calculates and disseminates implied volatility indices derived from individual stocks and equity ETFs options. In particular, it calculates five equity VIX indices based on option prices on five US stocks – VXAPL (Apple), VXAZN (Amazon), VXGS (Goldman Sachs), VXGOG (Google) and VXIBM (IBM) – on four international equity indices (VXEFA, VXEEM, VXFXI, VXEWZ) and on two US stock sectors (VXGDX, VXXLE). The only equity ETF volatility index that is not calculated from CBOE, comes from the Sydney-based research and investment firm Triple3 (T3Index), which has developed, in collaboration with Miami International Securities Exchange (MIAX Options), the SPIKES Volatility Index (SPIKE), which measures the expected 30-day volatility of the world largest exchange traded fund and the most actively traded security worldwide, the SPDR S&P 500 ETF (SPY).

IV indices

Currencies Volatility Indexes

The first currency implied volatility indices were introduced by JP Morgan in late 2006. The VXY and EM-VXY indexes represent the level of G10 and emerging-market currencies implied volatility respectively through a liquidity-weighted average of three-month at-the-money volatility. The J.P. Morgan Global FX Volatility Index (VXY Global) followed in 2011 to track implied volatility across all currencies pairs against the US dollar. Deutsche Bank launched a similar index in 2007, the Deutsche Bank Currency Volatility Index (CVIX).

CBOE was the first exchange to launch a foreign exchange implied volatility benchmark in 2008, the CBOE EuroCurrency ETF Volatility Index (EVZ) based on the CurrencyShares Euro Trust (FXE). Furthermore, CBOE started disseminating, in January 2015, three additional currency-related indices, using the prices of CME-traded currency futures options: the CBOE/CME FX Euro Volatility Index (EUVIX), the CBOE/CME FX Yen Volatility Index (JYVIX) and the CBOE/CME FX British Pound Volatility Index (BPVIX). Johannesburg Stock Exchange introduced in 2009 the SAVI Dollar (South African Volatility Index), which represents the 90-day forward-looking volatility of the dollar-rand exchange rate. Finally, in November 2021, CME Group launched the CVOL family of indexes on G5 FX currency pair futures, and (in May 2021) on MXN/USD and CHF/USD currency futures.

IV indices

Commodity Volatility Indexes

CBOE was also the first exchange to launch a commodity implied volatility index and today it calculates totally five commodity volatility indices that track volatility of both commodity ETFs and future options. The first two indices, the CBOE Crude Oil ETF Volatility Index (OVX) and the CBOE Gold ETF Volatility Index (GVZ) were launched in 2008. The third commodity ETF-based index, which was launched in March 2011, is the CBOE Silver ETF Volatility Index (VXSLV). CBOE also disseminates two volatility indices based on commodity futures options. In addition, CME Group launched in 2021 volatility indices on Energy, Metals and Agricultural Benchmarks expanding its its suite of CME Group Volatility Indexes (CVOL). In concluding, the only commodity volatility index outside the US is the South African Volatility Index (SAVI) for White Maize, which is based on the at-the-money three-month volatility of traded options on white maize.

IV indices

Interest Rates Volatility Indexes

Despite the fact that transaction volumes in the government bonds and the swap/ swaption markets dwarf equity markets, there are very few interest rate implied volatility indices. The main reason probably is that fixed income market volatility is characterized by quoting conventions and a level of complexity that makes its pricing considerably more difficult compared to equity volatility. Thus far, the only attempts to measure expectations of future volatility from traded interest rate derivatives are based on government bonds (mainly US Treasuries) and interest rate swaps. To the best of our knowledge, the Merrill Lynch Option Volatility Estimate (MOVE) – now called ICE BofA Volatility Index Move – was the first relevant index (available since 1988). Similar indices have been also developed by two other major investment banks, Deutsche Bank and Lehman Brothers.

In June 2012, Chicago Board Options Exchange introduced the CBOE Interest Rate Swap Volatility Index (SRVIX), which is based on 1-year over-the-counter (OTC) swaptions on 10-year U.S. Dollar interest rate swaps and constitutes the first exchange-traded volatility benchmark for interest rates. Furthermore, in May 2013, CBOE, in collaboration with CME Group, launched the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (TYVIX). In November 2020, CME Group introduced an implied volatility index on its 10-Year Treasury Note futures and in February and May 2021 addded additional fixed income indexes on Treasury and Eurodollar futures. The only respective attempt to measure expectations of future volatility from interest rate derivatives that doesn’t relate with the US market is the S&P/JPX JGB VIX, which measures the implied volatility of Japanese government bonds.

IV indices

Volatility of Volatility Indexes

The last asset class that obtained an implied volatility index was implied volatility itself. In March 2012, CBOE began publishing values for the CBOE "VIX of VIX" Index (VVIX). The VVIX is a volatility of volatility measure as it indicates the expected volatility of the 30-day forward price of the CBOE Volatility Index, the VIX. In October 2015, the EURO STOXX 50 Volatility of Volatility Index (V-VSTOXX) was introduced as an indicator of the expected volatility of the VSTOXX index, which in turn represents the market expectations of the EUROSTOXX 50 index future volatility.

IV indices

The evolution of implied volatility indices

In response to market participants’ demand for tradable products, derivatives exchanges and financial institutions have significantly broadened their volatility index offerings by including both futures-based and strategy-based indices. Since the spot implied volatility indices described above are difficult to replicate, CBOE and other exchanges introduced replicable indices that utilize prices of volatility indices futures contracts. Thus, investors can attempt to replicate a volatility-based strategy themselves through combined positions in derivatives or alternatively, gain exposure to that particular risk return characteristics through rules-based strategy indexes.

This note is based on the academic paper entitled “Implied Volatility Indices – A review “ co-authored with Prof. Siriopoulos and published in the Quarterly Review of Economics and Finance (QREF). The final published version can be found here (requires subscription), while an earlier working paper version can be found here (free access).