Blog: Is the VIX Broken? Nope.
Recently I’ve read some market commentators declare the VIX1 “broken" as a fear index because it’s not always down when the market is up and up when the market is down. I’ve heard this story several times over the years, but the only time the VIX went its own way was 2018 when a number of exotic derivatives tied to the VIX distorted its value. That appears to have been fixed. This time the explanation centers on increased trading in daily or tick settled index options. The longer dated monthly options used to calculate the VIX may have become too thinly traded to reflect market views. If this is the case, I would have to rethink the Market Uncertainty State Indicator (MUSI) since implied volatility has been an important uncertainty component for many years. The VIX, after all, is a prime indicator of the change in the market's investment horizon as postulated in the Fractal Market Hypothesis (FMH). So I think about the VIX a lot.
Unfortunately for the naysayers (but good for the MUSI), the VIX is actually behaving much as it always has. I base my view on three points: