Sunday, July 31, 2011

Keeping an Eye on the Fear Index

Posted By on Sun, Jul 31, 2011 at 10:20 AM

You're already familiar with financial yardsticks like the GDP, NYSE, AMEX and S&P. You may now want to keep an eye on something called the '"fear index."

The Chicago Board Options Exchange publishes a volatility index, or VIX. Introduced in 1993 by a Duke University professor, the fear index forecasts the market's volatility over the next 30 days. Additionally, CBOE has begun publishing a new tail-risk benchmark. "Tail risk" is the term investors sometimes use for the possibility that markets could experience a sudden and steep drop, not unlike the financial crisis in 2008.

Last week, the CBOE Market Volatility Index jumped as much as 9 percent to its highest level since mid-March, when the nuclear catastrophe in Japan became front page news. The VIX hit 25 on Friday. A reading of 30 is typically considered a fear tipping point.

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