Volatility Violins

March 28, 2011
By

(This article was first published on Milk Trader, and kindly contributed to R-bloggers)

Unlike many humans, markets love change. In fact, they look forward to it with great anticipation. Regular people like stability, for the most part. Unless you're a career gypsy, you like to stay in one place for some time. Making a home. Settling in, as it were. Unlike markets, where volatility is the raison d'etre.

I've plotted the values for VIX, which is the CBOE's volatility index calculated by some magic formula that considers 30-day expectation of price movement, in the chart below. Next to it is a plot of 30-day returns for the SPX, or a graph that plots all the percentage changes for each 30-day window. Quite frankly, I'm not sure what conclusions to draw from this, except that expectations in markets usually fall short.



The R code:

library(vioplot) 
library(quantmod)

VIX <- getSymbols("^VIX", auto.assign=FALSE)[,4]
SPX <- getSymbols("^GSPC", auto.assign=FALSE)[,4]

VIX <- VIX/100
SPX <- Delt(SPX, k=30)
SPX <- na.locf(SPX, na.rm=TRUE)
SPX <- abs(SPX)

vioplot(VIX, SPX, names=c("VIX", "SPX"), col="red3")

title("Violins of Volatility")

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