As the year that was 2013 wore on a common question that was lobbed at me was, “Is the VIX broken?”. I’m not sure how an index can be broken, that would be if something went wrong during the calculation of VIX. I know the question really was more like, “Is VIX telling me anything?”, since VIX basically behaved differently than any year since 2007. It was low and even when we had the small sell offs that got participants attention, there never seemed to be a panic spike in VIX. If anything, VIX wasn’t broke, it was right all year long. That is, stocks would sell off and VIX would not rise much (at least when compared to recent history). After the S&P 500 sold off the result was always a rebound to new highs. VIX indicated there was no reason to panic and VIX was right.
The table below shows some VIX statistics for the last ten years. Note that, unlike VXN or RVX, VIX did not make a 10 year low and the average for VIX was not the lowest average for the last 10 years. VIX is anything but broken, it is just low. As with any volatility measure there will be periods of low volatility and periods of high volatility. The concern should be when will VIX return to a high level, not is VIX broken.