The Cheap Volatility Illusion

As I write this on Aug. 10, despite all the economic problems facing investors (such as Greece, the slowing Chinese economy, a bear market in Chinese stocks, the collapse in commodity prices and Puerto Rico’s default), the VIX index, a measure of the market’s expectation of 30-day volatility, had closed above 14 only once since July 13.

That was July 27, when it closed at 15.6. Even so, that’s well below its historic average of about 20.

If you sort the VIX into decile buckets, the three lowest deciles have average levels of 11.4 percent, 12.8 percent and 14.3 percent. By contrast, the highest three deciles have averages of 23.5 percent, 26.9 percent and 37.7 percent.

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