Analysts at Credit Suisse Trading Strategy noted that there has been notable disconnect between stock costs and the volatility as measured by the VIX.
In the firm’s most recent Chartbook, the broker noted that typically, bid-ask spreads and transaction costs follow the VIX index. They wrote that this pattern makes sense as costs are linked to risk and the VIX Index does measure implied volatility.
However, recently this pattern has broken from its normal path. Credit Suisse said that the VIX is based on a 1 month horizon (and also volatility can occur on the upside and downside, but many people only care about downside risk).
“Why does this matter now,” the broker’s analysts wrote. “Ignoring the spike this week (8/20), the VIX has remained relatively muted since mid-July when Greek’s debt issues were (temporarily) resolved – despite China devaluing the Yuan, the continuing commodities meltdown, and other macro risks.”
In contrast, the Credit Strategy Trading Group added, bid-ask spreads and transaction costs have responded to the news by rising over the past month. This matches what the firm has seen in the Credit Suisse Fear Barometer (CSFB Index), which has gained over 6pts recently to near a 1-year high.
“The disconnect with the VIX may be explained by the VIX one month horizon compared to the three month for the CSFB,” the analysts wrote. “But more importantly, it also emphasizes how the VIX index may not be the best indicator of investor sentiment and market ‘fear.’ The CSFB measures the imbalance between demand for calls (upside) vs puts (hedges), whereas the VIX does not.”
