India Volatility Index (VIX)

Source:  This post on India Volatility Index VIX is based on the article “India VIX Index rallies: What does market volatility mean for investors?” published in “The Indian Express” on 14th May 2024.

Why in the News?

Recent, surge in the India VIX reflects the anticipated near-term volatility in the market.

About Volatility Index (VIX)

1. About Volatility Index (VIX): The Volatility Index, commonly known as VIX or the Fear Index, measures how much volatility market players expect in the near future.

2. Role of Volatility in Finance: Volatility refers to the rate and extent of price changes in the market, which is often associated with financial risk.

3. Behavior of the VIX: During periods when the market is highly volatile, the VIX tends to increase. Conversely, when market volatility decreases, the VIX tends to fall.

4. Calculation of the VIX:  The VIX is calculated based on the expected annualized volatility, expressed in percentage terms, derived from the order book of options on a specific underlying index.

About India VIX

1. About India VIX: The India VIX is an index that shows the expected level of volatility in the stock market over the next 30 days. Higher numbers mean more expected volatility.

2. How It Works: It uses the prices of options on the NIFTY Index to calculate expected future volatility. This is expressed as a percentage.

3. Why Is India VIX Important?

i) Indicator of Fear: It is sometimes called the “Fear Index” because it indicates how worried traders are about the market.

ii) Decision-Making: Investors look at the VIX to take decisions regarding investments. When the VIX is high, the market is considered riskier.

UPSC Syllabus: Indian Economy