Coronavirus Market Insight: Update 20th April 2020

20 April, 2020 | News

Comfort in the unknown

This week I will discuss a measure which shows that the investment market has become more comfortable with the expected market effects of COVID-19.

The VIX index (Chicago Board Options Exchange’s Volatility Index) – you can see why they abbreviated it – is a measure of the stock markets expected volatility (fluctuation). Although this particular measure is based on an American index, due to the worldwide nature of the pandemic it is reliable indicator for all developed markets.

The index is calculated by looking at the cost of options on each individual company. Basically, this is looking at what investors are willing to accept as the price for a company share in 30 days’ time. Although the method of calculating the index is complex, what it shows is quite simple. The VIX index is also referred as a fear indicator as it shows the amount of uncertainty in investors’ expectations.

The graph below shows the VIX index over the last 6 months (figures courtesy of CBOE):

You can see that although the index still sits higher than it would during typical market conditions, it has dropped significantly from the peak of the economic unknowns of the coronavirus (mid-March). This shows that although investors are still generally cautious, they have become more comfortable with their expectations. The index being lower generally indicates a reduction in the short-term movements of markets as there is less panic selling.

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