Feasibility of Industry-Specific Volatility Indices

Summary

This discussion considers whether VIX-style volatility indices could be created for individual S&P 500 industries. Since the VIX is derived from index option prices, the proposed analogue would likewise depend on an adequate market in options on the relevant industry or sector exposure. The replies say the concept is possible in theory, with liquid options as a key prerequisite.

They also point to practical limits: some industry option markets may be less liquid than options on the broad S&P 500, making hedging volatility products such as futures more difficult. Investor demand may also be too limited to support launching and maintaining specialized indices. The document offers qualitative feasibility considerations rather than a construction formula, liquidity measurements, or evidence that particular industry indices would be viable.

Key ideas

• A VIX-like industry measure would be derived from option prices on an industry exposure.
• Sufficiently liquid options are a prerequisite for calculating and supporting such an index.
• Lower liquidity can complicate hedging volatility products tied to an industry measure.
• The commercial feasibility of an index also depends on investor interest.

Tags

# Volatility Index for Industries


# Volatility Index for Industries












The VIX index is based on the S&P, I am wondering the feasibility of creating a VIX index for each of the S&P 500 Industries?

Would this even be possible?

## Answer by FFF (score 3, accepted)

https://quant.stackexchange.com/a/42313

The VIX Index is computed from option prices on S&P Index. A VIX-like Index for other industries would first require to have a liquid option market.

## Answer by user34971 (score 1)

https://quant.stackexchange.com/a/42294

In theory that would be possible. However, liquidity in industries could in some instances be substantially less than liquidity in the SPX thus making the hedging of volatility derivatives such as vol futures more difficult. Also, there may not be sufficient interest from investors to make the launching of industry/sector specific vol indices feasible.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.