about me
art
biz
Chess
corrections
economics
EconoSchool
Finance
friends
fun
game theory
games
geo
mathstat
misc
NatScience
... more
Profil
Logout
Subscribe Weblog

 

There has been some talk about the high level of the Credit Suisse Fear Barometer lately (e.g. SurlyTrader).
Bloomberg: The CS Fear Barometer measures investor sentiment for 3-month investment horizons by pricing a zero-cost collar. The collar is implemented by the selling of a 10% OTM SPX call option and using the proceeds to buy an OTM put. The CSFB level represents how far out-of-the-money that SPX put is. The higher the level, the greater the fear.
With the proceeds of selling a 10% OTM call you can currently only buy a 28% OTM put:

spx_csfb_tiny

{Click to enlarge}

But what does that mean? When comparing the CS Fear Barometer with the level of the S&P 500 over the last 15 years you will notice that
  1. Fear had a very low reading at the time of the dot-com crash and it stayed pretty low during the whole 2000-2003 equity market downturn
  2. Fear trended upwards during the equity market recovery
  3. Fear fell off a cliff quite some time before the global financial market meltdown (false sense of security?)
  4. Fear was close to its all-time low at a time where many bankers where talking about buying farmland
  5. Fear has been rising since the markets turned in March 2009
So it seems like the indicator could measure anything but fear. In 2009, when Credit Suisse introduced the index Reuters wrote: "The index would rise when there is excess investor demand for portfolio insurance or lack of demand for call options."

Obviously, it could also be a glut in the market. For example in case fund mangers think that there is not much upside in the current market they would start writing covered calls and reduce implied call volatility in the process. That shouldn't count as "fear".

Anyway, since for the last couple of years the CS Fear Barometer was just a blurred version of the inverse VIX I wonder whether anybody can distill some additional information:
spx_vix

Name

Url

Remember my settings?

Title:

Text:


JCaptcha - you have to read this picture in order to proceed
Change Picture