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The Greatest Collapse In The History Of The VIX Index

Tyler Durden's picture




 

Submitted by Christopher Cole via Artemis Capital Management,

The extraordinary market intervention by China in response to their declining market, coupled with further ‘kick the can down the road’ policies by the EU regarding Greece, resulted in the greatest collapse in the history of the VIX index (which is still ongoing as I write). Over the past five days and counting the VIX has fallen -40% from 19.97 to 12.11. To gain perspective on moves in volatility Artemis ranks consecutive drawups and drawdowns (peak-to-trough or trough-to-peak %  moves by day) in the VIX index and models them as a power law distributionWhile the concept may be obscure to grasp at first the ramifications of the analysis are enlightening.

What is a power-law distribution? The distributions of a wide variety of physical, biological, and human phenomena follow what is known as a power-law distribution. Examples include earthquakes, deaths in war and terrorism, populations of cities, solar flares, word frequencies in language, movie box office receipts… and financial asset price movements up and down over multiple days.

Supernormal Power-Law Violations: When you rank events from the above natural and human phenomena the vast majority of observations follow the power-law distribution perfectly- however the violations of the function are the most interesting. Power-law violations are true  black swans or supernormal observations because their results contain a degree of reflexivity that outside the boundary of what would be expected from an exponential growth function. Examples of supernormal violations in power laws across other phenomena include death counts in WWII ranked among all wars, box office receipts of the movie Titanic, the 9.2 Magnitude 1960 Chilean Earthquake, the population of Tokyo, the 1987 Black Monday Crash, and the 9/11 terror attack in NYC.
 
For volatility we define a Supernormal Volatility Collapse (Drawdown) as a multi-day decrease in spot-VIX index that violates power law distribution and is indicative of self-reflexivity in markets and unknown unknown events. These occur 1 out of every 920 drawdowns or 0.1087% of the time. Supernormal VIX collapses show returns below an expected power law distribution line since the extreme speed of collapse meets the fact that volatility is bounded by zero. 
 
The graph below shows data points representing the rankings of VIX peak-to-trough declines (y-axis  = % drawdown in vol over consecutive days & x-axis = ranking ).

As with most natural events – the vast majority of VIX drawdowns neatly follow the power law distribution function represented by the white line. The supernormal vol drawdowns to the lower left of the graph represent the most extreme violations of that power law (black swans) whereby the speed of collapse meets price constriction of implies due to the zero bound of volatility. They are the 9.2 earthquakes, 9/11s, and Titanics of VIX drawdowns.
 
We would like to highlight:

  • The ongoing decline in the VIX starting last week (and still going) is the largest supernormal volatility collapse in VIX history
  • 3 of the largest  supernormal VIX collapses have occurred in the last year alone
  • The top 7 ranked power law violations have ALL occurred during the regime of monetary easing between 2010 and today

In summary, over the past 2 years, we have been experiencing a quantifiable ‘outlier’ or ‘black swan’ decline in the VIX every 6 months as evaluated against history.
 
I can only point to government intervention as the core reason. I firmly believe that this moral hazard produces a hidden leverage and “shadow market gamma” that at some point will result in a sustained volatility outlier event in the opposite direction.

 

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Sat, 07/18/2015 - 15:20 | 6327476 Motorhead
Motorhead's picture

VIX, bitchez!

 

Sat, 07/18/2015 - 15:35 | 6327510 Oh regional Indian
Oh regional Indian's picture

Contra-indicators abound.

Baltic Dry skimming bottom for so long....no great global crash....allowed that is...perhaps it's all that off shore oil storage, eh.

Six sigma is the new normal.

The flavor of time has changed.

An Indian plays the blues...

https://www.youtube.com/watch?v=mxkHQXb5nDc

Sat, 07/18/2015 - 15:37 | 6327516 FL_Conservative
FL_Conservative's picture

What is there to worry about?  Obama and Mr. Yellin got this.

Sat, 07/18/2015 - 15:40 | 6327524 Vullsain
Vullsain's picture

It's different this time!!!

Sat, 07/18/2015 - 16:28 | 6327653 negative rates
negative rates's picture

By law it can't go any lower than 6.66, so no, it's not different this time, and if your country is ready to die, there is nothing to worry, about.

Sat, 07/18/2015 - 21:56 | 6328400 Soul Glow
Soul Glow's picture

VIX was created for the purpose to quell volatility in the markets.  Period.

Sat, 07/18/2015 - 16:28 | 6327658 max2205
max2205's picture

Stupid crackers 

Sat, 07/18/2015 - 20:11 | 6328150 Tall Tom
Tall Tom's picture

It's awesome this time.

Sat, 07/18/2015 - 16:36 | 6327676 Paveway IV
Paveway IV's picture

+1 for shadow market gamma

Sat, 07/18/2015 - 19:42 | 6328080 Scooby Dooby Doo
Scooby Dooby Doo's picture

Sing along, ok?

Scooby Dooby Doo sayz your music make me pooh.

Ok, stop singing now.

Sat, 07/18/2015 - 19:50 | 6328103 cpnscarlet
cpnscarlet's picture

"Six sigma is the new normal."

 

Damn - that's good and simple. +1000

Sat, 07/18/2015 - 15:40 | 6327521 HungryPorkChop
HungryPorkChop's picture

This is part of the algo's gone wild series.  They're capping VIX and gold n' silver by massive dumps of paper.  On the long side they're throwing everything including the kitchen sink at the stawk' market so it will be Pumped You Up.  Then rig interest rates near 0% and wallah, you have a nice way to print, print, print while keeping all signs of volatility and inflation beat down like a middle class job seeker.  Brilliant!! 

Sun, 07/19/2015 - 08:08 | 6329116 turtle
turtle's picture

Cheap Puts 

Sat, 07/18/2015 - 15:28 | 6327493 Antifaschistische
Antifaschistische's picture

i hate smart people

Sat, 07/18/2015 - 15:34 | 6327507 theundergroundm...
theundergroundmovement's picture

"There!  It's Vixed!!! errr, I mean fixed" says Janet Yellen

Sat, 07/18/2015 - 15:43 | 6327532 nakki
nakki's picture


I can only point to government intervention as the core reason. I firmly believe that this moral hazard produces a hidden leverage and “shadow market gamma” that at some point will result in a sustained volatility outlier event in the opposite direction.

What is so hard to understand? The FED is NOT the government.

Sat, 07/18/2015 - 16:04 | 6327590 Consuelo
Consuelo's picture

Technically, yes -- the Federal Reserve is not the government.    In actuality however, it forms a leg of the government's key apparatus to control the markets via the interest rate (swaps/derivatives), via the Exchange stabilization fund, the treasury and finally, the Fed.

 

 

Sat, 07/18/2015 - 15:45 | 6327537 FSFT
FSFT's picture

Trust in the machine

Sat, 07/18/2015 - 15:47 | 6327542 Dollarmedes
Dollarmedes's picture

Instead of the power law regression line, I would've preferred a normal distribution so that we could see the instances of supernormal deviations ABOVE the trend as well. It could show that both compressions and expansions of volatility occur under the central bank intervention regime.

Sat, 07/18/2015 - 15:48 | 6327550 theundergroundm...
theundergroundmovement's picture

Dammmmmnnnnnn! That VIXen is HOT!  But i've heard that she is real moody lately....

 

:)

Sat, 07/18/2015 - 15:53 | 6327561 FreeShitter
FreeShitter's picture

Algos™, they got this.

Sat, 07/18/2015 - 15:57 | 6327567 falak pema
falak pema's picture

There are so many "greatest collapses" occurring on ZH that I want to do the Sieg Heil like the royals.

Even the hardbitten vampire killers get soft smitten when invited to the vampire's ball ! 

Sat, 07/18/2015 - 16:13 | 6327613 Fun Facts
Fun Facts's picture

The Central Banks are using VIX as a weapon, not an indicator.

Sat, 07/18/2015 - 16:18 | 6327626 razorthin
razorthin's picture

The indications are that,at some point, the CB'ers will have weapons used against them (those that escape confiscation).

Sat, 07/18/2015 - 16:22 | 6327630 Iceobar
Iceobar's picture

CBOE July 13th closing numbers had just under 2 million VIX calls, which if not a record, was close to it,...publically posted....and it seems the only way to make money these days is to squeeeeze these large positions the opposite way. no matter the fundamentals or technicals.  IMHO, a sign ..... until one day......

 

http://www.cboe.com/data/mktstatall.aspx?Dy=13&Mo=7&Yr=2015

Sat, 07/18/2015 - 16:23 | 6327634 R19
R19's picture

PPT

Sat, 07/18/2015 - 16:37 | 6327683 Amish Hacker
Amish Hacker's picture

This is what we have instead of markets. Whatever happened to honest price discovery?

Sat, 07/18/2015 - 18:41 | 6327973 Bob
Bob's picture

I'm glad you asked that.  Finally!  I've often wondered if the Amish folk riding in their carriages on local roads around me and working in the fields nearby are asking themselves that, too. But it would be such poor form to ask!

We're all Amish now. 

Sat, 07/18/2015 - 17:16 | 6327780 Bob
Bob's picture

Oh, I see.  A function of the "self-reflexivity of markets." 

Sat, 07/18/2015 - 18:03 | 6327896 Scooby Dooby Doo
Scooby Dooby Doo's picture

Scooby Dooby Doo where are you?
I'm reading myself for a collapse or somesuch.

And Scooby Dooby Doo will Shaggy prepare too?
I sent him to purchase some Scooby snacks!

Sat, 07/18/2015 - 19:46 | 6328092 q99x2
q99x2's picture

You should have had to learn that lesson while buying TVIX. You would never forget it.

Sat, 07/18/2015 - 19:52 | 6328106 cpnscarlet
cpnscarlet's picture

OK, OK....it's rigged.

Now tell me something I don't know.

 

"Hey, I have been crucified on a cross of gold."

William Jennings Browbeaten

Sat, 07/18/2015 - 22:43 | 6328518 Wave-Tech
Wave-Tech's picture

Traditionally high VIX readings (40+) usually occur after an extended or sharp decline while sentiment is still quite bearish. Historically, contrarians view high readings toward the 40 level as bullish. As such, it is reasonable to conclude that markets are in a balanced state of equilibrium at VIX readings close to the 30 level.

Conflicting signals between VIX and the market can also yield sentiment clues for the short term. If the market declines sharply and VIX remains unchanged or decreases in value (towards complacency), it could indicate that the decline has further to go. Contrarians might take the view that there is still not enough bearishness or panic in the market to warrant a bottom. If the market advances sharply and VIX increases in value (towards panic), it could indicate that the advance has further to go. In such an instance, contrarians might take the view that there is not enough bullishness or complacency to warrant a top.

In the mind of mainstream financial media, fixed VIX readings beneath 20 (excessively bearish and overly complacent) are "the new (bubble-permitting) normal" that ignorant cheerleaders applaud. To pursue and lobby for such policies of accommodation that foster such readings is foolish, self-destructive, and ultimately suicidal.

Read more at "The Fix is In the VIX"

Sun, 07/19/2015 - 00:10 | 6328678 FlyinHigh
FlyinHigh's picture

Thank You, Wave Tech

I'm not one of the "Bright Boys" that understands all of your extra read there.

But, I did understand it enough to know, That I'm more screwed now then before I read it.

Thanks again.

Sat, 07/18/2015 - 22:44 | 6328519 SillySalesmanQu...
SillySalesmanQuestion's picture

One day, the VIX will uncoil with the energy of a large, compressed, spring that has been suddenly released...BOING!

Sat, 07/18/2015 - 23:04 | 6328569 Perimetr
Perimetr's picture

First, shoot all the banksters.

Sun, 07/19/2015 - 08:46 | 6329161 matagorda
matagorda's picture

Same as FDR's hog slaughter program, see http://www.lib.niu.edu/1993/ihy930578.html.  In the 1930's the economy was still largely agricultural, so, to be seen as "doing something," FDR thought it would be a good idea to kill all the hogs in order to raise farm prices.  Similarly today, the fed has to be seen as doing something, so they have enacted a variety of measures to make our financialized economy appear healthier than it is.  Gotta sop up the excess supply of risk assets just like FDR's hogs.  Of course, the majority at the time were very poor, so cheap food would have benefitted them, just like today's retiring boomers could benefit from higher CD rates.  Notwithstanding that in both cases the free markets would have solved both problems, the vested interests of the time could not just stand by and take their medicine.  The result in both cases is/was just a prolonging of misery as the smart money stays on the sidelines rather than participate in, to quote Sam Zell, "an economy nobody believes in." 

Sun, 07/19/2015 - 09:06 | 6329173 fancyfree
fancyfree's picture

That's right, Zerohedge, doom and gloom pundits, find a way to frighten people if you possibly can.  Of course your index that measures market volatility is going to be "off the charts".  That is because we, the coalition for the rule of law, are using the Global Debt Facility that is administered by the Board of Governors of the World Bank and IMF to mobilize humanity's assets for the benefit of humanity.  In another article you have measured the human costs of the Greek austerity program. 

http://www.zerohedge.com/news/2015-07-17/greece-now-full-blown-humanitar...https://s3.amazonaws.com/khudes/breakthrough.pdf On April 12, 2014  at the Bretton Woods Spring Meetings, the world's peoples decided to end the very unpopular system of fractional reserve paper currencies which causes these problems.  In implementation of this decision, on April 19, 2015, the Board of Governors of the Bretton Woods institutions placed the Bank for International Settlements into receivership in the Global Debt Facility

The coalition for the rule of law (the BRICS, G-77, Germany, Japan and the United States minus the Federal Reserve) is replacing the paper currencies issued by the Bank for International Settlements with currencies minted from the international monetary gold reserves that are administered by the Board of Governors of the World Bank and International Monetary Fund.  In case you are wondering whether there is such an entity as the United States minus the Federal Reserve, you need only realize that the following correspondence with Chuck Watts, who is going to testify tomorrow to the United States Department of State on the Universal Periodic Review of human rights in the United States, is viral on the internet.

 

From: Karen Hudes Date:

Fri, Jul 17, 2015 at 6:46 AM

Subject: Should the USA’s Human Rights’ Record Be Evaluated?

To: Chuck Watts

 

Thank you for your email forwarding me a draft of your upcoming testimony to the State Department on July 20, 2015. Your planned testimony is woefully inadequate, and should include the fact that human rights in the United States are deprived by the corruption in the international financial system. In the United States, people are denied their human rights under a secret military rule and second, secret Constitution, with kangaroo courts presided over by administrators who have broken their oaths of office to sit in the courts guaranteed under Article III of the Constitution: https://s3.amazonaws.com/khudes/Twitter7.16.15.pdf

Sincerely, Karen Hudes Acting General Counsel International Bank for Reconstruction and Development Legal Counsel Global Debt Facility TVM-LSM-666

Do NOT follow this link or you will be banned from the site!