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Measuring fear in financial markets
Most recent values for the degree of herd behavior
Most recent values of the HIX and the CIX
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Tuesday May 15, 2012 |
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Dow Jones HIX 55.633% |
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Dow Jones CIX 52.191% |
What do the HIX and the CIX measure?
The HIX and the CIX measure the market's
expectation of the short term (1 month) degree of co-movement (i.e herd
behavior) between the components of the Dow Jones index. Both measures
take values in the interval [0,1], with a 'larger number' corresponding
to 'more co-movement of stock prices'. Today's values of the respective
measures are obtained by comparing the current market situation with
the situation that would occur in case of a perfect co-movement behavior.
The HIX and the CIX are model-independent forward looking measures,
calculated from observed option price data for the Dow Jones as well as
for its components. The HIX compares a market volatility estimate of the
Dow Jones index with its perfect co-movement counterpart, whereas the
CIX is based on the variance swap rate of the Dow Jones.
The
crosses in the following graph represent the observed Dow Jones index
call and put options. The dots indicate the price of the corresponding
index options, in case all stock prices would exhibit perfect
co-movement behavior. The latter index option prices are 'comonotonic
option prices'. There prices are not observed but can be determined from
the option prices on the components of the Dow Jones index. A narrowing
gap between the two option curves indicates that there is an increasing
implied degree of co-movement or herd behavior between the different
stocks.
Similar measures can be defined for any stock market index provided there are options traded on the index and on its components.
Observed Dow Jones option prices and their comonotonic values
How to calculate the HIX and the CIX?
The calculations of the HIX and the CIX are based on the theory of comonotonicity and on the methodology explained in:
- The Herd Behavior Index: a new measure for
systemic risk in financial markets.
J. Dhaene, D. Linders, W. Schoutens & D. Vyncke (2011). Research Report AFI_1157, FEB, K.U.Leuven.
Also available at SSRN: http://ssrn.com/abstract=1926191.
- FIX - The fear index - Measuring market fear.
J. Dhaene, J. Dony, M. Forys, D. Linders & W. Schoutens (2011). Research report, FEB, KULeuven.
Also available at SSRN: http://ssrn.com/abstract=1888335.
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