An article by Vanderbilt’s Robert Whaley explaining the Chicago Board Options Exchange’s volatility index was among the leading global financial articles of 2009 in Institutional Investor Journals.
The results were based on user traffic at www.iijournals.com. Access an abstract of the article, “Understanding the VIX,” by clicking here. Here is the full article.
Whaley, the Valere Blair Potter Professor of Management in Finance, knows just how to explain the VIX or, more commonly, “the fear index.” He created it in 1993 while working as a consultant for CBOE.
The VIX created considerable buzz during the recent market turmoil because it provides a real-time measure of investor confidence. VIX futures and options contracts are now among the most active exchange-traded derivative products.
The VIX rises when there is excess demand to buy S&P 500 put options. Index puts are a kind of portfolio insurance, giving investors the option to sell a stock during a certain time period at a certain price. The buying pressure when many investors are buying put options subsequently causes put prices to rise. A natural interpretation of the rising VIX is that investor unease or fear has increased, according to Whaley.
The article was intended to provide greater understanding to investors who follow the VIX. While the volatility index can be a useful tool to assess the current economy, “investors need to understand exactly what the index means in order to fully appreciate its usefulness and to avoid misunderstandings and misconceptions,” Whaley explained in the abstract.
Based on the large number of “clicks” on the article, it appears many investors wanted to do just that. Whaley first described the VIX in a 1993 Journal of Derivatives article.
Whaley also is credited with creating other derivatives-based indexes, including the Nasdaq market volatility index (VXN) and the BuyWrite monthly index (BXM).
Earlier this year, Whaley co-authored with fellow Owen Graduate School of Management professor Hans Stoll an article that cautioned against increased regulatory intervention in commodity futures markets. “Commodity Index Investing and Commodity Futures Prices” is slated to be published in the Journal of Applied Finance in early 2010.
Media contact: Jennifer Johnston (615) 322-NEWS
Jennifer.johnston@vanderbilt.edu