NSE unveils a volatility meter

MUMBAI: The National Stock Exchange (NSE) on Tuesday launched volatility index, a tool available in developed markets, to help investors in judging market risks better.

Right now, the figures of volatility index called India VIX would be released only at the end of the day. But, NSE intends to launch intra-day indicators too once the current index is understood by market participants.

The index value would be based on the Nifty 50 option prices and indicate the market’s expected volatility over the next 30 calendar days.

The nearest term contracts would be used to deduce the value. The value would be expressed in annualised percentage terms. Typically, the volatility index and Nifty 50, on which it is based, would be negatively co-related.

So, higher the implied volatility the market is likely to be on the lower side and vice-versa. “More liquidity comes into the options, the better the India VIX numbers would be,” said Ravi Narain, managing director and chief executive officer of NSE.

 Interestingly, the back-tested India VIX index, as seen in the chart, shows the highest figure of about 55% on January 21, 2008, when the markets started tearing. The Nifty 50 volatility is currently down to 31.4% as on April 8, 2008, from the peak of 55%. It was 30.99% at the end of the April 7, 2008 trading session.

 “Anytime there is a global or domestic shock, the index (India VIX) would rise and then try to revert to its average value of 30%,” said Narain. The exchange also plans to launch tradeable contracts on the India VIX index. “As the investors begin to discuss, debate… and understand the index better… at some point in future we would be hopeful of launching a tradeable contract. It is not our intention to launch the tradeable contract in the near future,” Narain said.

Sebi chairman C B Bhave said, “You may hear comments that the volatility index is not clearly telling how volatile the market is and some other measure is required. The debate is healthy. By the time we will understand the index, we would be ready to launch products on it.”

 In the current era of technology, Bhave said, “It will not take that long to launch products. We will see good amount of trading on these products …which would bring you even nearer to what the market’s perception of volatility is. Today we are deriving volatility on the basis of what the options are. We will see some good amount of activity.”

But the methodology used to derive the volatility values too would evolve over a period, said an NSE official.

In Chicago, where such an index was launched in 1993, it has been found that the negative co-relation between the volatility index and the market index has improved as the market matured and learnt more about the index.