The Great IV Deflation

The Great IV Deflation 1 of 5

● Market implied volatility (VIX) has declined

substantially since its high of 85.47 in March of 2020 to
yesterday’s close (and long term median) of 16.99...a
decline of exactly 80% over 13 months.
● Although this seems like quite a large collapse in an
asset, we have to compare apples to apples...in other
words, we have to compare this decline to other
declines in IV after “extreme” outlier events.
 The Great IV Deflation 2 of 5

STUDY
● VIX, 1989 to present
● Recorded magnitude and duration of declines to below long term
median of 17.50 in VIX after major outlier events. (The median of 17.50
happens to be the general “clustering” level of the VIX.
● As long as the high of the outlier move was at least 50 (occurs 1% of the
time), it was recorded in this study.
● There was no constraint on duration of decline for it to be included in this
study.
● “Highs” recorded are intraday highs, not closes. This is due to most
extreme VIX spikes happening intraday but closing much lower.
However, we still want to include those occurrences.
 The Great IV Deflation 3 of 5

● Looking at the five other extreme outlier events since 1989 (where the
VIX reached a high above 50), we see that 2020 and 2008 are actually
very similar in the magnitude of decline from its high to the VIX’s long
term median but also the length of time it took to get there.
Duration in Percent
High of Outlier Subsequent Percentage
Relative High Calendar Decline Per
Event Low Decline
Days Day
Oct 16, 1989 51.71 17.47 66% 32 2.1%
Oct 23, 2008 96.40 17.42 82% 498 0.2%
Aug 24, 2015 53.29 17.42 67% 45 1.5%
Feb 6, 2018 50.30 16.49 67% 17 3.9%
Mar 18, 2020 85.47 17.16 80% 385 0.2%
 The Great IV Deflation 4 of 5

● We observe that when there was an extreme outlier

move, VIX contracts relatively quickly back to its
median most of the time.
● The really interesting fact is that of the two occurrences
we have where the VIX contracted over 80% (2008 and
2020), it took exponentially longer to get back to its
median than the other outlier moves where VIX only
spiked to 50...keep in mind there were only five
“extreme” outlier moves in the last 31 years.
 The Great IV Deflation 5 of 5

TAKEAWAYS
● In the last 31 years, there were just five extreme outlier moves
where the VIX climbed over 50.
● The two times that VIX climbed to over 80, its decline was around
90% less severe on a daily basis compared to the outlier moves
where VIX only made it to 50 (around -0.2% per day compared to
-2.0% per day respectively).
● Keep in mind that there are only five “extreme” outlier occurrences to
draw from...meaning that there is no statistical significance in
concluding that higher outlier VIX spikes are associated with slower
declines on a daily percentage basis.
Extra Slides