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Chart of the Week: Volatility and Mean Reversion


Comapring 1987-1988 to 2008-2009.

This week, I've elected to compare the aftermath of volatility spikes in 1987 and 2008. For the 1987 series, which begins with Black Monday, I've chosen to use a reconstruction of the "original VIX" which has been tracked under the VXO ticker since 2003 and peaked at approximately 172; for 2008 I begin on November 20, on which the close of 80.86 is the highest VIX close ever.

The key takeaway: For the first 6 months after the volatility spike high, post-spike volatility fell faster in 1987-1988 than it did in 2008-2009. This isn't surprising in that the consensus of opinion is that there was much less structural volatility and a much shorter period of extreme risk during 1987-1988 than during 2008-2009.

Interestingly enough, however, now that we're 8 months and 169 trading days removed from the November 20 VIX spike, it turns out that volatility has fallen to much lower levels in the current environment than in the 8 months following the 1987-1988 volatility spike.

The graphic highlights that volatility remained at a higher level in 2008-2009 than 1987-1988 throughout the 50-, 100-, and 150-day milestone. In the last month, however, the absolute level of volatility for 2009 has been consistently lower than the readings from 21 years ago. Whether there's indeed less risk in 2009 than 1988, or whether the current period is simply characterized by higher levels of complacency remains to be seen.

For those who may want to chime in about comparing the VIX to the VXO, please note that the VIX closed at 23.09 on Friday and the VXO closed at 23.06. Using VXO data for 2008-2009 would result in the same takeaways and only slightly different data.

For a related post, see VXO Chart from 1987-1988 and Explanation of VIX versus VXO.

Click to enlarge
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