Last Wednesday (September 24, 2008), I posted a blog entry entitled “Financial market risk and the “Peltzman” effect” which showed a time series graph since 2006 for the CBOE volatility index (aka “VIX”). Today is noteworthy in financial market history not only because the Dow Jones industrial average suffered its largest one day point drop in history — 778 points — but also because the VIX registered its highest closing level since its inception (in January 1990). The VIX closed today at 46.72, which is impressive considering that the average closing price for the VIX is 19.17 (this is based upon a total of 4,723 daily closing prices dating back to January 2, 1990). Today’s VIX reading also represents the 6th largest one day change in volatility for the entire time series. This is all the more impressive since volatility has been well above average long-run levels ever since the middle of September, which is the day that Lehman Brothers filed for Chapter 11 bankruptcy reorganization.
As I noted in my 9/24/2008 blog entry, VIX measures “consensus” forecasts of future (U.S.) stock market volatility as reflected in the market prices of call and put options written on the S&P 500 index. The higher the value for VIX, the more risk averse investors are in the aggregate. The last time the VIX was this high was on October 8, 1998, in the middle of the so-called Long-Term Capital Management financial crisis.
Here’s the daily time series graph for VIX from January 2, 1990 through the close of business today; the spike at the far right of the graph is from today: