Market Volatility Estimates Precise Until Critical Drop, Uncertainty Looms
Volatility is a measure of market risk estimated from option prices. The VIX index uses S&P 500 options to predict volatility. By analyzing these options, researchers found that they can accurately estimate S&P 500 volatility when it is high. However, when volatility is low, the estimates become less reliable due to a decrease in the sensitivity of option prices to volatility changes.