INDIA VOLATILITY INDEX (Syllabus: GS Paper 3 – Economy)

Context: India Volatility Index recently surpassed the 21 mark, indicating heightened fear among traders or market participants regarding expected volatility.

Volatility Index

• About: It is a measure of the market’s expectation of volatility over the near term. 

o Volatility is often described as the ‘rate and magnitude of changes in prices’ and in finance often referred to as risk.

• Market Behavior: In periods of heightened market volatility, significant movements occur in either direction, leading to an uptick in the volatility index.
• Correlation with Market Stability: Conversely, as market volatility diminishes, the Volatility Index experiences a decline, reflecting a return to stability.
• Method of Calculation: It is calculated based on the order book of options linked to the underlying index, providing a snapshot of market sentiment and expectations.

India Volatility Index

• About: India VIX is a volatility index computed by the NSE based on the order book of NIFTY Options.

o The computation of India VIX involves using the best bid-ask quotes of near and next-month NIFTY options contracts, which are traded on the F&O segment of NSE.

• Time Frame: India VIX indicates the investor’s perception of the market’s volatility in the near term, depicting the expected market volatility over the next 30 calendar days.

o According to NSE, higher India VIX values suggest higher expected volatility, and lower values indicate lower expected volatility.

• Trademark and License: ‘VIX’ is a trademark of the CBOE. Standard & Poor’s has granted a license to NSE, with permission from the CBOE, to use such a mark in the name of the India VIX and for purposes relating to the India VIX.