As we noted yesterday, if your assumption is that the VIX is p, when what it really is is q, it doesn’t make any sense to complain when ~p occurs.
Several other bloggers joined the fray:
- Don Fishback makes the crucial point that the VIX range is based on one standard deviation, not the total range of all excepted outcomes, which was the fundamental omission from the article;
- Bill Luby‘s post is especially good on the point that the VIX moves in different patterns across different time horizons;
- Mark Wolfinger goes in for a point-by-point analysis, concluding that
1. A little knowledge is a dangerous thing
2. The blind really do lead the blind. Or in this case, two under-informed financial writers are trying to educate the public – and are offering only confusion.
- Adam Warner notes that any strict application of an indicator is inappropriate when not approached on a probabilistic basis.
That last point is really key: using the VIX in any hard and fast market indicator model is a recipe for trouble. Even when measured on a relative basis (as we demonstrated in our VIX:VXV study), fixed indicator parameters just won’t cut it. If any of this sounds esoteric or overly geeky, it really isn’t: it’s simply a question of whether or not you know the products you’re using. Traders who regard the VIX as having somehow “failed” or as being “broken” seem not to have understood the index in the first place.