Excerpts courtesy of Simon Jessup, Reuters
Investors seeking to predict the magnitude of share price moves at times of market flux may get a faulty steer from a closely watched “fear gauge”, one of investment banking’s top equity traders has warned.
Citi’s Mike Pringle, global head of equity trading at the third-biggest U.S. bank, told Reuters that the VIX volatility index , is now as much a traded asset as it is a guide to investors seeking protection from losses.
The VIX reflects Standard & Poor’s 500 .SPX options prices and, therefore, expectations of future market moves. The idea is that as people become fearful of losing their money, they are more willing to buy a put option as protection.
At the moment, it remains at very low levels.
“A big mistake the market makes is looking at the VIX as an indicator of stock market risk. Why? Because it’s an asset class and it’s more traded for yield than protection,” Pringle said. “It’s still relevant in extremes, but not in a normal functioning market,” Pringle said.
While persuading others of the VIX’s flaws is not easy, Pringle said Citi’s handling of risk management in equities had been restructured accordingly.
Rather than relying solely on the VIX, Citi traders and clients can turn to their “Central Risk Desk”– through which a large proportion of its trades are routed.
The computer programs that underpin the desk’s activities assess around 60 measures of market stress and timing – from global risk arbitrage spreads to dividends to repo rates – to get a better read on sentiment, behavior and deal timing.
Looked through this prism, there is greater risk currently in global markets than the narrower VIX is suggesting.
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