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A Tale of Two Indices

Authors: Carr, Peter
Wu, Liuren
Issue Date: 19-Mar-2004
Series/Report no.: SC-CFE-04-01
Abstract: In 1993, the Chicago Board of Options Exchange (CBOE) introduced the COBE Volatility Index (VIX). This index has become the de facto benchmark for stock market volatility. On September 22, 2003, the CBOE revamped the definition and calculation of the VIX, and back-calculated the new VIX up to 1990 based on historical option prices. The CBOE is also planning to launch futures and options on the new VIX. In this paper, we describe the major differences between the old and the new VIXs, derive the theoretical underpinnings for the two indices, and discuss the practical motivation for the recent switch. We also study the historical behaviors of the two indices.
Appears in Collections:Financial Econometrics

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