NSE unveils volatility index to gauge market swings

"On the foreign bourses there are various tradable products available, based on the volatility index, however NSE does not intend to introduce any such products in immediate future but chances of this in the long term cannot be ruled out," Narian added.

ABOUT VOLATILITY INDEX

Volatility index or VIX, also called the "fear index" or "risk index," is an indicator that captures the level of fear in the capital markets and help investors understand market risks better and take decisions accordingly. When investors turn fearful, the VIX index moves higher. The Chicago Board Options Exchange (CBOE) was the first to develop volatility index in 1993. There is also the VXN which tracks the Nasdaq and VXD that tracks the Dow Jones Industrial Average.

The implied volatility, as captured by the volatility index, is not about the size of the price swings, but rather the implied risks associated with the stock markets.

Implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.

Market volatility keeps changing as new information flows into the market. High readings indicate a higher risk in the market place. For instance, the reading of VIX reached almost 45 in 1998 as the LTCM (Long-term Capital Management) crisis exploded. It took a few months for the investor's fears to abate and the VIX to return to below 20. The World Trade Center attack in 2001 also made the VIX climb above 45, as the investors' fear level reached the zenith.