Prof. Robert Whaley, the creator of CBOE's original VIX, now renamed VXO, defines a Uniform Volatility Index in this fashion:
"The VIX is said to be the 'investor fear gauge.' Given its construction, the name fits. 'Gauge' simply means a measure. The descriptor 'fear'' arises from the fact that investors are averse to risk. Since the VIX is constructed from the implied volatilities of S& P 100 index options, it is, by definition, a measure of expected stock market risk. The descriptor 'investor' arises from the fact that investors set the level of the VIX, albeit indirectly. Investor demands for S&P 100 call and put options set prices and these prices, in turn, are used to imply the level of the VIX. Over its sixteen year history, the VIX has acted reliably as a fear gauge. High levels of VIX are coincident with high degrees of market turmoil, whether the turmoil is attributable to stock market decline, the threat of war, unexpected change in interest rates, or a number of other newsworthy events. The higher the VIX, the greater the fear."
The above chart is courtesy of Prof. Whaley's website.
Last two charts are courtesy of CBOE.com website.
At Hamzei Analytics, we compute, in real-time, Five Hundred Uniform Volatilities so we can measure and relatively rank the level of fear among investors of the most popular narrow and broad-based stock indices, HOLDRS, as well as common stocks.
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