In Europe, regional volatility indices have been developed and published to measure the implied volatility in local markets. VSTOXX, VDAX-NEW, VFTSE follow the CBOE VIX methodology and have become the investor fear gauge in the Europe, German and UK markets. Exhibit 1 shows that these indices are highly correlated. Since Jan. 2000, VSTOXX have been 91% correlated with VDAX-NEW and 80% correlated with VFTSE. This reflects the high correlation among the European local equity markets. In the same period, EURO STOXX 50 is 93% correlated with DAX and 89% correlated with FTSE 100. These three European regional volatility indices are moderately (51 – 52%) correlated to CBOE VIX, which reflects the moderate correlation (53% – 61%) between the European and US equity markets.
Exhibit 1: Volatility Benchmark Indices in Europe and US (Jan. 2000 – Dec. 2011)
Exhibit 2 shows that the negative correlation between the equity market and its corresponding volatility benchmark is maintained in Europe. Since the beginning of 2000, VSTOXX is -75% correlated to EURO STOXX 50. This is in line with the correlation (-76%) between VIX and S$P 500. In the same period, the correlation between VDAX and DAX and the correlation between VFTSE and FTSE 100 are both -70%.
Exhibit 2: VSTOXX and EURO STOXX 50 Performance History (Jan. 2000 – Dec. 2011)