Blog: Implied Vols may be losing their power

In the Market Uncertainty State Indicator (MUSI), I use implied volatility indices to measure equity risk, and an additional one for liquidity risk. They are the S&P VIX, the EuroStoxx VSTOXX, and the Oil OVX. For liquidity I combine these with the MOVE index, a measure of US Treasury implied volatility as I explain here. I began using the VIX back in 1992 and the others since 2007. They have been the most reliable of all market uncertainty cycle indicators. The only other one that is close is the investment grade credit spread.

But I'm growing concerned that these implied volatility indices are losing their effectiveness, particularly as leading indicators. While I have not yet lost confidence in them, I thought I'd share my concerns and maybe get some feedback from you about this.