Fear on Wall Street…the most prominent case of panic that struck stock investors

The financial crisis that struck global markets between 2007 and 2009 increased investors’ reliance on indicators that reflect market participants’ aversion to risk, and it became common to assume that changes in risk appetite constitute an important factor in determining asset prices.

The CME Volatility Index was introduced in 1993, and is simply referred to as the “Wall Street Fear Index”, and measures the volatility of the S&P 500 index in the US market.

To view more topics and reports on the Numbers Selections page

After Federal Reserve policymakers lowered their expectations about the pace of monetary easing next year, on Wednesday, the VIX index immediately rose by 74% to close at 27.62 points, and this rise is the second largest in its history, after a 115% jump to above… Level of 37 points in February 2018.

Most notable cases the fear That hit the stock markets

– The index shows the market’s expectations for volatility over the next 30 days. Investors use the index, also known as the “VIX,” to understand market risks as well as traders’ confidence. It is calculated based on the prices of buy and sell options on the main market index, as a sudden rise indicates a rush by investors to buy Selling options for hedging.

Usually, the performance of the volatility index is inversely related to the index of large-cap US stocks. When the price of the VIX index rises, the value of the S&P 500 index decreases, but analysts recommend using the Wall Street Fear Index in conjunction with the analysis. Technical and basic.

The third largest spike in the Volatility Index on record occurred on August 5, 2024, when fears of a recession in the United States caused it to increase by approximately 65% ​​to close above 38 points. On a daily basis, the Volatility Index briefly exceeded 65 points in that session.

Strong negative correlation between VIX and stocks

The correlation between the volatility index and the S&P 500 index has been relatively stable over the past two decades, which confirms their tendency to move in opposite directions most of the time.

During the period from 1990 to 2022, the markets witnessed the strongest negative correlation between the S&P 500 and the VIX index in the years 2007, 2008, and 2011.

Interestingly, the three years also saw a higher average closing value of the VIX index compared to previous years, with 2008 being the highest average of all years at 32.69 points.

– On the contrary, the weakest correlation occurred in 2003, 2004 and 2017, and the average value of the Wall Street Fear Index in these years was much lower than in previous years, with 2017 reaching its lowest levels during the period at 11.09 points.

– There are other years that have witnessed an increaseThere was a sharp increase in the volatility index, with a weaker correlation, for example, the first year of 2020 coinciding with the pandemic. There were also years that witnessed a lower average volatility index and a strong correlation of change with the “S&P 500”, as happened during the years 2005, 2014, 2019. .

– In terms of seasonality, the strongest correlation is observed in the autumn months and the weakest in the summer, but the correlation remains relatively stable under different market conditions (rise/decline, growth/recession).

Source: Arqaam – CNBC – TD Bank – MacroOption