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Article explaining popular ‘fear index‘ receives top honors from journal

Jan. 14, 2010, 12:05 PM

An article by Vanderbilt‘s Robert Whaley explaining the Chicago Board Options Exchange‘s volatility index received the Best Article award as voted by subscribers of Institutional Investor Inc.‘s The Journal of Portfolio Management.

The award was among the winners of the 11th Annual Bernstein Fabozzi/Jacobs Levy Awards for articles contributing to the theory and practice of portfolio management, announced this week.

Whaley felt compelled to write a detailed explanation of the VIX, more commonly known as “the fear index,” to separate “fact from fantasy” as the economic turbulence ratcheted up financial news coverage.

“The events of last fall caused a great deal of turmoil in the marketplace,” said Whaley, the Valere Blair Potter Professor of Management in Finance at Vanderbilt‘s Owen Graduate School of Management. “The financial press scrambled to find different angles in describing the degree of panic, and VIX became a centerpiece. What I found disturbing, however, is that many media reports reflected little or no understanding of what VIX represents.”

Whaley created the VIX, or “fear index,” in 1993 while working as a consultant for CBOE. He first described the VIX in a 1993 Journal of Derivatives article.

“The key insight is that VIX is a real-time consensus view of the degree of anxiety. Judging by its behavior over the past year, investors remained very concerned about the market until well into 2009. Calmer times then set in, and VIX has now returned to more normal levels. We have waited out the storm,” Whaley said.

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.

The VIX 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 Standard & Poor‘s 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.

Last month, the article received another accolade: It was ranked among the leading global financial articles of 2009 in Institutional Investor Journals. The results were based on user traffic at Access an abstract of the article, “Understanding the VIX,” by clicking here. Here is the full 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 early this year.

Vanderbilt University‘s Owen Graduate School of Management is ranked as a top institution by Business Week, the Wall Street Journal, U.S. News & World Report, Financial Times and Forbes. For more information about Owen, visit

Additional media contacts:
Andrew O‘Donnell
The Journal of Portfolio Management
(212) 224-3076

Catherine Basha
Jacobs Levy Equity Management
(973) 410-9222

Media contact: Jennifer Johnston, (615) 322-NEWS