A ‘grey swan’ event — an unlikely but high-impact market event — that pundits spoke about for years may be on your door-step. On Monday, a 120 per cent spike in the CBOE VIX — the US volatility index for equities that has the world’s largest derivative products linked to it — resulted in a stock-market shock nobody was prepared for.
The Sensex and Nifty fell more than 3 per cent at the opening but staged a sharp recovery to close with a loss of about 1.5 per cent. The pullback was only due to domestic institutions jumping in to save the day, by buying stocks worth ₹1,700 crore.
Foreign institutions saw massive buying of ‘Put’ options as they spent ₹2,836 crore in buying index options.
Experts say that if the spike in the VIX index does not cool down in a couple of days, equity markets globally could see a 2000- or 2008-like market crash.
After trading around its historic low level for nearly two years, the VIX spiked to 38.80 from 16.80 as the Dow Jones and S&P, two key US indices, crashed by 4.6 and 4.1 per cent, respectively, on Monday. This overnight sell-off in the US saw the Sensex and Nifty fall by 561 points and 168 points, respectively.
Tuesday saw the ‘fear gauge’ in the US spike to 50 less than two hours before the Dow and S&P opened for trading.
The VIX index in India, which is not yet widely traded but more of a reference point, hit a 15-month high as it rose 30 per cent to touch a high of 23.16 before closing at 20.
Stock market movement is inversely related to the VIX, which is nothing but investors’ perception of volatility to come in one year.
Will such a wild spike in the US VIX index lead to a Bear Stearns-like collapse, wiping out investor wealth?
“The answer is yes,” said Rohit Srivastava, who runs a derivative-linked fund at Sharekhan BNP Paribas. “VIX has had billions of dollars linked to it on the short side since two years. With this spike, the worst could be coming but we cannot predict the timing and how much more it will impact equity markets. The frenzy has just started in one corner of the market.”