The Effect of Fear, VXO, on the Stock Market and Interest Rates
Posted on | October 30, 2008 | 5 Comments
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Fear is an emotional response to threats or danger. Fear on the stock market is measured by the VXO, the exchange volatility index. The greater the amount of volatility, the higher the VXO will rise. Historically the VXO fluctuates between 10 and 35. On October 19th, 1987, the VXO skyrocketed to 150.2 at the close of the market and accelerated to 172.8 intraday the following day. These numbers are quite extreme as that was the largest single day decline in the history of the markets and would have never happened with any type of technologies to stop trading.
The first day after the US House passed the Bailout Plan bill in 2008, fear reached a level that had never been seen before. The VXO rocketed to 69.4 intraday which was a post 1987 record. The current VXO has recently accelerated to over 100 in early October. These are numbers never seen in the modern stock market. Fear in the current market is the highest it has been since 1987. It took almost TWO years to regain the one day crash in 1987, so who really knows how long it will take to regain this multi-month crash?
During this time, the Federal Reserve Bank has decided to stimulate the economy by making it easier to borrow money. They do this by lowering the Fed Funds Rate. The Fed Funds Rate is currently 1.0%, but the unsettling part is, we cannot go below zero. At one point, decreasing rates has to stop. This is a VERY interesting time in history as rates are low and inflation is up. Anyone have any ideas on how this will work itself out?
Read more about the stock market at “We Haven’t Seen the Bottom in the Stock Markets Yet”
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5 Responses to “The Effect of Fear, VXO, on the Stock Market and Interest Rates”
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October 31st, 2008 @ 12:39 pm
Hm, you explain VIX but then start using VXO with no explanation.
As to how it can work itself out, I think one possibility is that eventually people will realize the situation isn’t so bad and ideally gain enough confidence, or at least apathy/indifference, so as not to be completely negated by an interest hike.
October 31st, 2008 @ 8:20 pm
[...] the exchange volatility index, hit levels that have not been reached since the dreaded month of October 1987. The amount of fear that was in the market during October cannot be sustained for long, therefore [...]
October 31st, 2008 @ 9:09 pm
sorry about the confusing. the current VXO was the “old” VIX similar to the current CCI being the old CRB.
November 1st, 2008 @ 8:27 am
[...] Read the rest of this great post here [...]
November 1st, 2008 @ 10:43 am
Great points, Jesse. Someone on twitter earlier today was talking about how in marketing, perception is reality. I think that is probably true everywhere: what you believe is true. Can’t think of a better case study than the stock market to illustrate this point!