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The VVIX, also known as the Volatility of Volatility Index, is a measure that tracks the expected volatility of the CBOE Volatility Index (VIX). As the VIX reflects market participants’ expectations for future volatility in the S&P 500 index, the VVIX provides insights into the market’s perception of volatility uncertainty in the VIX itself. When the VVIX is high, it suggests that there is greater uncertainty or fear about potential fluctuations in the VIX, indicating increased market concern or turbulence. Conversely, a low VVIX may signify a more stable or confident market sentiment regarding VIX fluctuations. The VVIX serves as a valuable tool for traders and investors to gauge the level of market anxiety and uncertainty surrounding the VIX and, in turn, broader market conditions.
Reference [1] studied the dynamics of VVIX and compared it to the VIX. The authors pointed out the differences between the 2 indices,
Most but not all stylized facts of volatility are applicable to the vol-of-vol, measured by the VVIX. It has robust mean reversion, distinct jumps in both directions, a weak day-of-the-week effect, and an immediate asymmetric relationship with the S&P500. Due to a higher variation of its underlying and time-varying VVRP, it is always significantly higher than the VIX. The natural nexus between both volatility indices is mirrored in the high correlation between their innovations, despite an often distinct sensitivity to market events. Unusual for volatility and in contrast to the VIX, the VVIX shows a significant upward trend that started years before the economic turbulences that began in 2020. This increase stems partly from the higher volatility of the VIX and higher VVRP. As can be seen in Figure 10, the VIX options market evolved from 2006 to 2014 with increasing volume. Therefore, liquidity is another plausible reason for the VVIX trend and the strengthened connection to the VIX. Furthermore, partial autocorrelation becomes nearly insignificant after one day, and the immediate reaction to S&P500 price changes indicates fast incorporation of new market information.
This paper provides an analysis of the similarities and differences between the VIX and VVIX indices. The findings hold significant implications for traders and hedgers who engage in VIX options trading. By understanding the relationship between these two volatility indices, market participants can make more informed decisions regarding risk management, hedging strategies, and assessing market sentiment.
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References
[1] Stefan Albers, The fear of fear in the US stock market: Changing characteristics of the VVIX, Finance Research Letters, 55,
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