Ten years ago today, we witnessed that largest one-day VIX spike in the nearly three decade history of the VIX. On that day, the VIX rallied from a prior close of 11.15 to 18.31 – a 64.2% gain. The move came in conjunction with a 3.5% decline in the S&P 500 (large, but nothing like what would follow during the next two years) and followed overnight concerns related to the Chinese government raising interest rates to discourage speculation. The fears in China were largely responsible for a 8.8% loss in the Shanghai Composite Index and a 9.9% loss in the FTSE/Xinhua China 25 index that is the basis for the popular Chinese ETF, iShares China Large-Cap (NYSE:FXI).
In retrospect, the biggest VIX spike of all was a short-lived phenomenon whose fundamental and technical underpinnings turned out to pose no lasting threats. As is often the case, traders who faded this move (and keep in mind there were no VIX ETPs available at that time) and bet on mean reversion cleaned up on that trade.
So, did this move in 2007 provide a hint as to what would follow in 2008? As I see it, the timing was merely a coincidence.
It may not be a coincidence, however, that the biggest VIX spike in history helped to usher in the golden era of VIX spikes, with 15 of the top 22 one-day VIX spikes of all time having occurred during the past decade, as is reflected in the graphic below. Of course, most of the spike in VIX spike activity was the result of the Great Recession and some of the “disaster imprinting” that followed such a severe shock to many investor psyches.
Some may look around at a VIX that is not too much different now than it was a decade ago and wonder what it might take to trigger another 64% jump in the VIX. Certainly there is a huge policy uncertainty overhang at the moment, lots of political (and related economic) uncertainty in Europe and there are always some black swans lurking just out of our sightlines.
For now, however, will just have to live with that eerie, unsettling feeling that often accompanies low volatility and wait for another bump in the night before we reassess the volatility landscape.