Podcast: VIX and the Virus

The emergence of the novel coronavirus in the first quarter of 2020 caused severe shocks to the economy and capital markets. Volatility, as measured by the CBOE Volatility Index, or the VIX, has reached historic highs. The VIX has started to come down, but remains elevated. In this discussion, we ask: is the worst of the market rout behind us?

Ken Bentsen, SIFMA president and CEO, sat down with Katie Kolchin, CFA and Director of SIFMA Research, and Torsten Sløk, chief economist and managing director at Deutsche Bank Securities, to put context around the recent market volatility and to shed light on what may lie ahead for markets, the economy and COVID-19.


Deutsche Bank published a simple yet striking chart that shows a strong correlation between the VIX and the number of countries with a daily growth rate of COVID-19 infections in excess of 5%. The chart suggests the virus may have reached a peak in late March to early April and market stress, correspondingly, may be going away. However, much depends on the success of reopening economies and whether we see a resurgence of the virus.

Source: Deutsche Bank

An analysis by SIFMA Insights, The VIX’s Wild Ride, compared levels of the VIX during the COVID-19 crisis to the global financial crisis and other historical high watermarks. The VIX peaked at 82.69 in March, reaching a level many thought we would never again see after the global financial crisis. While levels have subsided, they remain elevated when compared to periods of calm in the markets – we are not out of the woods just yet.

Source: Bloomberg


Edited for clarity

Ken Bentsen: Thanks for joining us for this episode of SIFMA’s podcast series. I’m Ken Bentsen, SIFMA’s President and CEO.

The emergence of COVID-19 in the first quarter of 2020 caused severe shocks to the economy and the capital markets. The market turmoil is evidenced by sharp price declines – yet spikes in volumes – in equities markets, which closed the first quarter with their worst performance since the financial crisis. Volatility, as measured by the CBOE’s Volatility Index, or the VIX, has reached historic highs. While the VIX has started to come down, it remains elevated. Today, we’re going to ask: is the worst of the market rout behind us?

I’m joined by Katie Kolchin, CFA and Director of SIFMA’s Research team, and Torsten Sløk, chief economist and managing director at Deutsche Bank Securities. Both have dug into the data behind the VIX and have some quite interesting insights. Katie and Torsten, thank you for joining us.

Katie Kolchin: Thank you.

Torsten Sløk: Thank you.

Ken: Let’s lay some groundwork to start our discussion. Torsten, can you explain why the VIX is such a reliable indicator of market sentiment?

Torsten: VIX is essentially an indicator derived from options prices as to what people expect 30 days into the future. So one way of thinking about the VIX indicator is to think about it as an expression of what are the standard deviation of views, in other words how diverse are the views? Do people all agree that we are going in the same direction? Or is there disagreement among market participants in terms of where we are going? So, when the VIX is high that shows that there is significant disagreement about which direction we are going in and when VIX is low, that means that generally everyone agrees that we are going in the same direction. So in that sense, it is a very important indicator for telling us what are expectations as to where markets think we are going here in the short term.

Ken: With the markets, I would importantly note, have remained opened and functioning as intended but they underwent an extreme period of volatility. So that volatility was reflected notwithstanding markets being open.

Torsten: Absolutely. Markets were definitely open and we can discuss and I know you have done a lot of work on how much liquidity there was in different markets and which markets didn’t really function the way they normally should or that we would like them to but the answer certainly is markets were open and it was possible to trade in many markets. In some cases, bid-offer spreads may have been wider. But the VIX indicator was clearly flashing red in late March and early April. We were very high levels where it was clearly telling you that there was a lot of people that were in different agreement and different levels of agreement about where we were going and this expression of disagreement came up in the VIX indicator in the form of some people making significant bets that we would go wider or if you will down in equities and other people thinking that we would go up. So, that is why the VIX ultimately became one way of gauging whether markets were getting better or worse day by day.

Ken: Katie, you just published a report that compares the VIX today to the global financial crisis and other high watermarks. As you so aptly titled the report, it’s been a wild ride. Can you walk us through your analysis?

Katie: Yes, thank you, Ken. The March 16 peak of 82.69 surpassed the VIX’s previous high of 80 during the 2008 financial crisis. For comparison, we started with the VIX at 12.47 on January 2 and an average in January of 13.94. Both of these are below the average throughout 2019 which was around the 15 level.

Volatility started increasing in February, with an average of 19.63 and peak of 39.16. And then we spiked in March where the average was 57.74 fr the month and again the peak in March was 82.69.

Now we’ve seen levels subside throughout April and we’re down around the 32 level at the time of this discussion. But that is still quite high. For example, 44.12 was the average for April and we’re only around the 15 level for all of 2019. So we’re still significantly elevated particularly compared to historical benign market periods.

Ken: So maybe it would be a good idea to dig in a little deeper on that, on how the COVID-19 volatility compares to previous periods. Torsten, do you have thoughts on that?

Torsten: What’s interesting about – also what Katie is saying – is that when you look at the growth rate in the number of new cases of COVID around the world then you can compare, in a very simple picture, two lines. One line is the VIX, which of course went up a lot, as Katie just described, and now is beginning to come down. It’s only at the 30-32 level so we’re not quite back to where we were on average in 2019. But, that chart and that line is actually very highly correlated with the number of countries that have growth rates in the number of coronavirus cases of more than five percent on a daily basis. In other words, you are beginning to hear a slowdown in the growth rate in the number of countries that have high levels of growth in the number of people that have coronavirus. That means that, ultimately, you should expect to see market volatility be correlated with what’s going on in terms of the virus beginning to subside.

That’s not to say by any means that the virus problem is solved, but the intensity of the virus in markets and globally is beginning at least to subside and get into the background. That’s a very important indicator in our view for what we should expect to see in the VIX to continue to move lower.

By historical standards, the move higher up into the 80s – as Katie described – we have just never, ever seen that before. This was higher than what we saw during the financial crisis. It is highly unusual that over such a short period of time we saw such a significant amount of distress in financial markets. So by that measure, Ken to your good question, things today were much, much speedier in terms of the degeneration in markets and of course, because everything that the Fed and fiscal policy did, we have managed to bring things down but ultimately VIX and volatility in financial markets will be driven by the virus and whether the virus curve is flattening out. Thankfully, globally the virus curve is flattening out around the world and that is giving us confidence that we should continue to see VIX move lower over the coming weeks.

Ken: Katie, what have you shown in your analysis?

Katie: To follow that pattern, first I will just say is that it was quite clear that the COVID-19 market stress was much worse than any other period. We went back to the 90s which of course the U.S. was in a recession in 1990. We peaked at 47 with the VIX. Then, in 1997 and 1998, you had the Asian Financial Crisis and the Russian Ruble Crisis, which led to the demise of Long Term Capital Management, the large hedge fund. We peaked at 45.74 during that crisis. Then, of course, in the early 2000s, we had the scandals at WorldCom and Enron and then followed by the bursting of the dot-com bubble. Again, the peak was only 45. So, as Torsten was saying, getting up to the 80s, we saw that at one point we got up to 80 during the financial crisis. But, what’s really interesting is when you compare to the big one, to the global financial crisis where we never thought we would see volatility at these levels again in our lifetimes. The global financial crisis had a much longer time period, took longer to bubble up, we got to those levels and then took a long time to settle back down. But I think we are giving the edge here to COVID-19 because it has been a much shorter time period for the VIX to spike to the same levels as the global financial crisis in a much shorter timeframe.

Ken: I’d note – Torsten, you got into this a little bit as well in talking about the changes in different jurisdictions based upon the curve – these are two different crises. The financial crisis was a true financial crisis where this is not a financial crisis. This is a pandemic that created initially a liquidity crisis, a confidence issue, but the cause and recovery will be much different. How do you see that playing out over the long run or does the VIX tell us anything about that plays out over the long run?

Torsten: I think that is really important, Ken, because there are two dimensions where we sit today and as we look ahead.

The first thing is exactly this issue that this so far to a large degree has been a liquidity event. It hasn’t really morphed quite yet into a solvency event. The longer time this lasts and the longer time of course we will have the lockdown around and the longer time the unemployment rate will remain high, those will be the drivers of whether this moves from a liquidity crisis to a solvency crisis. 

But generally speaking, and this is the second point where we sit today and as Katie just mentioned, if you think about some of the events that we went through in history, whenever we had high levels of VIX it is actually quite impressive how resilient the financial system has been over the last one or two months. We have not had any major headlines in terms of anything in the financial system to the degree that we had in previous events when VIX has gone up. So, in that sense, the financial system has been quite resilient and actually has been able to withstand this quite violent and by many measures record high turbulence that we have been through. the bottom line is still that where we are now, the global economy is still now trying to come back on its feet after this significant hit that we have taken as a result of the virus but the financial system and the financial sector actually has done incredibly well at least from that resilience perspective compared to some of the events and episodes that we have been through before that Katie described.

Ken: You talked about a little bit earlier, you charted out different countries based upon peaks and infection rates in excess of five percent and where that’s flattened out. Do you anticipate there will be a correlation in those jurisdictions going forward assuming that their infection rates stay relatively corrected?

Torsten: Absolutely. Those countries where the curves flatten should also see their economies come back first and they should also see their financial markets stabilize first.

That is why a significant risk in this debate is this very simple discussion about, okay but will people follow the social distancing guidelines? If people do not follow the social distancing guidelines, we risk that we will have a curve that in the worst case will reaccelerate on the virus front because we are, generally speaking, Ken to your good question here, we are generally battling a number of different wars. We are battling a war trying to flatten out the virus curve. We are also trying to flatten out the economic curve with both fiscal policy and monetary policy. Finally, we also are battling on a third front trying to stabilize financial markets so they don’t magnify the original problem that stores are closed and corporates are not seeing the revenue that they normally see. Those different areas, it becomes very important that the key driver of everything, to your good question, is whether exactly whether the virus curve is flattening out.

It really does come down to something as simple as are people following their social distancing guidelines? Are people washing hands? Are we seeing basically a lot of things that will still argue for the curve flattening out or are their risks in certain states or in certain countries where we might see a reacceleration because if that is the case then we have to go back to square one and think about what does that mean for the economy and what does that mean for markets.

Ken: The report from SIFMA Insights and Torsten’s chart are available on SIFMA’s website, www.sifma.org. While you are there, I encourage you to explore our other resources to promote effective and resilient capital markets. 

Torsten and Katie, I want to thank you for spending some time with us today. Thank you for providing the material and I thank our listeners for being here as well. Again, please visit our website at www.sifma.org for this information and more.

Thank you very much.


Kenneth E. Bentsen, Jr. is president and CEO of SIFMA, the voice of the nation’s securities industry. Katie Kolchin, CFA, is Director of SIFMA Research. Torsten Sløk, Ph.D. is Chief Economist and Managing Director, Deutsche Bank Securities.