VSTOXX turns 20: Experts appraise the volatility index’s standing in equity markets

The VSTOXX® was introduced on April 20, 2005, during a calm and positive time for equity markets. The launch was a significant moment for European investors, offering a transparent measure of implied volatility that could be used to inform investment decisions.Not only was the VSTOXX quickly adopted as the region’s undisputed gauge of market stress, but it also helped broaden access to volatility as an investable asset class in Europe and facilitated multiple volatility trading strategies. In 2024, over 21 million futures and options on VSTOXX exchanged hands on Eurex.The VSTOXX indices track real-time options prices on the EURO STOXX 50® benchmark, thus reflecting market expectations of future volatility in Eurozone stocks. Although the main VSTOXX 30 days index (STOXX ticker: V2TX) is the most popular – and is usually referred to as "the VSTOXX" – eleven other indices are calculated, covering fixed maturities up to 360 days in increments of 30 days.Their function as market sentiment barometers and hedging instruments was tested once again this month, when concerns about disruptions to global trade and their effect on US economic growth sent the main VSTOXX to a three-year high. By contrast, the EURO STOXX 50 dropped 8.8% in the first nine sessions in April, headed for its worst month since June 2022.We caught up with experts at Eurex and STOXX to ask them what VSTOXX represents for investment portfolios as the index enters its third decade of existence. Below are some excerpts.Zubin Ramdarshan, Head of Derivatives Product Design, Deutsche Börse:“VSTOXX — Europe’s ‘fear gauge’ — has entered the digital age. With artificial intelligence, machine learning and cloud computing powering advanced trading strategies, Eurex members are seizing microsecond opportunities and redefining volatility trading. As we look ahead, bridging the liquidity gap to the VIX in the US and exploring fixed-income volatility indices remain key priorities.”One of the continuing trends is the move to shorter-dated volatility options. As liquidity continues to build in index, ETFs and single-stock volatility products, investors have little reason to play trigger events using longer-dated options when shorter-dated contracts are as liquid as they are.VSTOXX futures at Eurex have a multiplier that is a tenth the size of the standard VIX futures in the US. This smaller contract size enables more nimble trading and allows for participation by market participants with less capital to deploy to a given strategy.Matt Koren, Sales Americas, Eurex:“As liquidity in VSTOXX markets reaches new highs, the participant base is evolving. Once dominated by institutions, the ecosystem is now attracting retail traders seeking opportunities beyond the US — fueled by deeper liquidity, greater access and a maturing European volatility landscape.”Figure 1: VSTOXX historical comparison to the EURO STOXX 50“The days of relying solely on US index markets for global volatility hedging may be over. As trade barriers rise and markets decouple, VSTOXX and regional volatility indices are becoming essential tools for navigating uncertainty — offering more precise, localized hedging strategies in an evolving global landscape.”The VSTOXX and VIX show a high correlation, and both usually respond in tandem to global events. However, more localized events, such as national elections, tend to cause moves in one index that aren’t always replicated as strongly in the other. The existence of a Europe-specific volatility index offers a more accurate tool for regional hedging strategies.Thomas Shuttlewood, Associate Vice President, Product Development, STOXX:“The VSTOXX methodology is based upon how one would recreate a variance swap. Utilizing the deep suite of EURO STOXX 50 derivatives available on Eurex, we can construct a portfolio of out-of-the-money options, which are weighted inversely to their strike price and then aggregated, to design a product that is exposed purely to variance. With volatility being the square root of variance, we can use this theory to create an index that gives a pure measure of European implied volatility.”To ensure a robust index, option prices are screened for availability and minimum price thresholds. This process, and the subsequent index calculation, is done every five seconds throughout the day to give an accurate measurement at any given time.Sophie Granchi, Sales France, Switzerland & Benelux, Eurex:“VSTOXX is the go-to instrument for trading European volatility — less mean-reverting than VIX and quick to react when markets move. It’s a proven tool for tail hedging when it counts.”The VSTOXX more than doubled to 47 on April 7 from 21 at the start of the month, as investors worried that import tariffs imposed by US President Donald Trump would derail global trade and economic growth. It was the steepest five-day jump in the VSTOXX since the start of the COVID-19 pandemic.Hamish Seegopaul, Head of Index Product Innovation, STOXX:“For over 20 years now, the VSTOXX has been an important component of the investor toolkit — as the barometer for expectations on European volatility, a measurement tool for market uncertainty and an enabler of tradable instruments on volatility. Its methodology has withstood the test of time, and as we move to a less globalized world, its utility for investors will only continue to grow.”The last 20 years have seen the introduction of index-based volatility strategies using the VSTOXX as a starting point. There are a number of indices based upon short- and mid-term VSTOXX futures, with replicated long and short exposure.Elsewhere, the EURO STOXX 50® Volatility-Balanced index combines a base investment in the EURO STOXX 50 with a variable allocation to the VSTOXX® Short-Term Futures index.The Balanced strategy dynamically allocates weight away from equities and into volatility futures in times of market stress, with each asset’s weight determined by the prevailing volatility environment.The VSTOXX is even used as a calculation input, for example as a risk indicator, for our EURO STOXX 50 Risk Control indices.Investors can also resort to the VDAX®, which measures the volatility of the German equity market based on options on the benchmark DAX®.Looking aheadAs more investors and traders turn to the VSTOXX, both trading volumes and practices are likely to evolve.Besides the move to shorter-dated volatility options, a second phenomenon is the extension in trading hours for volatility derivatives. This is likely to grow as more exchanges extend hours.Twenty years ago, volatility indices were deemed esoteric, and volatility trading was a concept reserved for those with advanced financial knowledge. Today, that has changed thanks to the millions of investment products based on the index. The VSTOXX has played its role in the democratization of investing, and, in that sense, the next 20 years may bring further benefits to investors.Weiter zum vollständigen Artikel bei Deutsche Boerse AG Unsponsored American Deposit Weiter zum vollständigen Artikel bei Deutsche Boerse AG Unsponsored American Deposit