October 28, 2008, 6:00 am

VIX – The Fear Index

by: The Financial Blogger    Category: Investment, Market and Risk,Trading
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The only thing to fear is fear itself”. I got this quote from Rosevelt about 75 years ago. Well let me tell you that it can’t be more accurate. What is fear? Fear occurs when we think that something bad will happen. However, fear is not real since it is based on an individual or a group’s perception. Considering our modern society, medias can definitely help boosting fear or reassuring people.

For example, we just went thought government’s election and we didn’t get much coverage on it since media were too busy talking about the Apocalypse on the market. Some people may say that sex sells, well catastrophe sells even better!

There is nothing to help people getting reassured by the market. We can now follow the VIX – aka The Fear Index. When I first read about it, I was quite curious to know how it works. In fact, it is quite simple; it measures the daily fluctuation and assesses the global volatility on the market.

The Fear index was created by Robert E. Whaley a renowned expert in the field of derivative securities. The VIX exists since 1993 (in September 22,2003 CBOE upgraded to the “new” VIX which is now based on the more popular S&P 500 index (SPX)). but it increased in popularity recently because of the market turmoil.

By following this graph:

You can see if people panic or not. As you can see, it reached unknown peaks during September and October. At the beginning of October, somebody told me that he had good news about the market: “the month of September is over”. I asked him yesterday what he thought about October so far with a smile 😉

How do we handle fear on the market?

This is actually quite easy; don’t listen to people 😉 Ask yourself why you bought stocks or mutual funds back in 2005,2006,2007. The reasons why you went into the market back then should be as good today.

In order to understand better the fear factor; here is another definition over at wikipedia.

You can also watch this video about fear and the price of oil, gold and US dollar value : FEAR VIDEO

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Comments

I just discovered your blog through PF Buzz and I’m so glad I did!

This post is so true and it’s something my husband and I have been talking about a lot recently. If people could just tune out the media, which is working everyone into a frenzy, I think things would be easier. But, as you point out “fear sells” and television and print publications understand this all too well. You’re much more likely to read an article with the headline “The Next Great Depression?” than you are “A Level Headed Look at the Markets.”

by: The Financial Blogger | October 30th, 2008 (10:32 pm)

YMT, that is too bad that fear sells… I wish we could read in big letters: “market it doing well, people are working and life is beautiful” 😉 hum… wishful thinking!