The inventor of the Vix index, which is said to be a measurement of fear in the stock market based on options trading, now believes his old ideas may not accurately measure investor apprehension. I have been thinking for a long time that “fear” doesn’t quite capture the underlying unease with which investors go about their business in the modern era. We are just as concerned about not being able to fund increasingly longer retirements as we are concerned about the potential for stock market drawdowns. This concern no longer manifests itself as a simple selling or hedging activity.
Menachem Brenner has a new construct to describe this concern.
via The Wall Street Journal:
Investors these days are puzzling over the lack of volatility on Wall Street. Menachem Brenner hopes they’ll soon be buzzing about a new indicator: the heightened level of ambiguity…
“The VIX is low because it doesn’t measure ambiguity. The uncertainty is much bigger than that,” Mr. Brenner said. “I believe that’s what ambiguity is going to capture.”
To me, the idea of “ambiguity” is like saying – Look, I don’t feel like I have a good handle on why stocks are moving up, and I’m in, but totally uncomfortable about it all. At my shop we speak with hundreds of high net worth investors every month. This is the zeitgeist that’s been in place for most of the last few years. I would argue that it’s healthy, and preferable to the sort of overconfidence en masse that you would have expected historically after a bull run.
Read more about Brenner’s new Ambiguity Index efforts…