Synopsis
What is India VIX?
India VIX is a measure of implied volatility derived from option prices, which captures the market’s collective expectation of near-term volatility. Unlike traditional equity indices that measure price levels, the VIX reflects sentiment and anticipated market fluctuations.
Why is India VIX Important?
- India VIX is a valuable tool for risk assessment and hedging strategies.
- It serves as an indicator of expected market volatility, helping market participants, including institutional investors and asset managers, perform risk management and tactical asset allocation decisions.
- India VIX provides a real-time estimate of expected market volatility, enabling investors to make informed decisions.
How is India VIX Calculated?
India VIX is calculated using a methodology adopted from the Chicago Board Options Exchange (CBOE), tailored to suit the Indian derivatives market. It involves using bid-ask quotes of out-of-the-money (OTM) call and put options from the near and next-month expiry contracts of the Nifty 50 index.
Interpreting VIX Levels: What Does a Number Mean?
India VIX values can be interpreted to understand prevailing market sentiment. Generally, a VIX reading below 13 signifies a calm market with low expected volatility, while a range of 13 to 17 is considered normal. Values between 17 and 25 suggest increasing nervousness among investors, and a VIX above 25 indicates elevated volatility and potential market turbulence.
India VIX and Nifty: A Negative Correlation
Historically, India VIX has exhibited a strong negative correlation with the Nifty 50 Index. When the Nifty experiences a sharp decline, the VIX typically spikes, reflecting heightened uncertainty fear and increased demand for protective derivatives.
Asymmetrical Relationship Between Nifty and VIX
| Nifty’s Average Daily Return | VIX’s Average Daily Change |
| -5% | 9.3% |
| -3% to -5% | 9.6% |
| 0% to 3% | 2.03% |
| 3% to 5% | -1.67% |
| 5% | -1.46% |
The asymmetrical relationship between Nifty and VIX is evident in how VIX levels respond across different ranges of Nifty’s average daily returns.
Don’t Ignore Volatility
Volatility is not merely a risk factor but a dimension of the market that holds valuable insights. The India VIX serves as a transparent, real-time indicator of investor sentiment and expected market fluctuation.
Conclusion
The India VIX is a valuable tool for risk assessment and hedging strategies, providing a real-time estimate of expected market volatility. Its strong negative correlation with the Nifty 50 Index makes it an essential indicator for market participants. As the market continues to evolve, the importance of India VIX will only increase.
“The author Chetan Kukreja is chief of research – passive funds at Motilal Oswal Asset Management Company. Views are own.”
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