‘Fear Index’ debuts on the Brazilian market – 03/19/2024 – Market

Brazil will have its own “fear index” starting this Tuesday (19). B3, in partnership with the company S&P Dow Jones Indices, developed an indicator that measures the volatility of Ibovespa, the main index on the Brazilian Stock Exchange, in real time during spot trading on the local market.

Called S&P/B3 Ibovespa VIX, it uses the same technology as the original VIX, which measures the volatility of the S&P 500, the main American stock index.

Using points, they quantify the volatility priced by the financial market for the next 30 days based on the negotiation of Ibovespa futures contracts. In practice, the more points, the greater the expected volatility. The fewer points, the less volatile behavior of the index is expected.

Thus, the VIX works as a thermometer of investor sentiment. When it is above 25 points it is a warning sign of high volatility. When it goes above 30 points, it is a sign of extreme volatility, frightening investors.

In 2020, at the beginning of the Covid-19 pandemic, the American VIX broke its record, at 82.69 points. The previous high was in 2008, during the financial crisis.

This Monday (18), however, the US index was at 14 points, indicating less volatility in the American market.

When developing the index, B3 made retroactive calculations of what the Ibovespa VIX score would be since 2021. It behaves in a similar way to the American VIX, except in moments typically critical to the local market, such as the 2022 elections.

Another point of dissonance is in 2021, when the then Jair Bolsonaro (PL) government broke the spending ceiling to fund Auxílio Brasil, increasing Brazil’s fiscal risk.

“The introduction of implied volatility indices, such as the S&P/B3 Ibovespa VIX index, reflects the liquid ecosystem of products in Brazil and complements S&P DJI’s market-leading indices offering,” said Tim Brennan, director of Capital Markets at S&P Dow Jones Indices.

In the future, in addition to being a risk perception metric, it will serve as the basis for new products, such as futures contracts and index funds. The higher the VIX, the more the asset can appreciate, for example, as a way of protecting investors from market volatility.

According to B3, the development of this new product was not previously possible due to the lack of liquidity that the Ibovespa options, used in calculating the index, had on the market.

Other markets have also created their own volatility indices, such as Mexico, the Euro Zone and Hong Kong. There are also similar indicators to measure implied volatility when trading products other than stock indices such as oil, gold and currencies.