As a former floor trader, I find the market movement of the last week to be very intriguing. China concerns saw the world financial markets tumble, while the rebound of the last two days seems to suggest that the markets overreacted. The VIX spiked to over 50 during the recent turmoil before retreating to a more “normal” level in the mid-20s. This begs the question: does an up market mean that volatility is lower?

Market data certainly suggests this to be the case. It is generally accepted that when a market goes up, volatility goes down. The opposite can be said for declining markets as volatility tends to increase during those times. One need look no further than this week’s decline to see this occurrence. However, should volatility decline as much as the VIX suggests? With the “whipsawing” that the market has seen this week, how many would be willing to sell the VIX at 25? Just because a model produces a definitive result, it is important for organizations to remember that there are other factors at play in financial markets, including human emotion. This is why it is important to have an independent, expert voice to advise your firm regarding its risk profile. VIX is merely one benchmark for volatility. Protection of capital is of utmost importance to every firm, and an understanding of volatility is key to minimizing investment risk.