Jul 27, 2010

Russian Volatility Index

[EDIT: Updated info on Russian vol index here]

ОТКРЫТИЕ is a Russian brokerage firm that pioneered IVO - volatility index that is based on options on RTS Index. The methodology is similar to that of the VIX. The two differences in the algorithm are due to lower liquidity in the Russian options market. First, instead of using mid-market prices IVO uses theoretical prices from parametric volatility skew model (I did not find the details on the model yet). Second, it uses a different formula to interpolate different months to a 30-day volatility - since there are only few listed months on RTS IVO uses different weights to extrapolate to 30-day vol. Details here, data here.

My interest in IVO volatility index is not purely theoretical - understanding similarities and differences of other volatility indexes helps me develop better models for VIX trading. As you can see from the chart the behavior of VIX and IVO is overall similar. Average level of IVO is 46, about twice that of the VIX (23). Maximum of IVO is 195, compared with 80 for VIX. The distribution of extreme points fit to a power-law with similar exponents. Interestingly enough both indexes were at around the same value in late 07 - early 08 before spiking during the credit crisis.

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