Why the VIX Does Not Fully Capture Stock Market Risk

Investors and traders are always looking for reliable indicators of market conditions, especially anything tied to volatility and risk, as it can help avoid losses.

One such indicator that has risen to prominence is the Volatility Index, or VIX. It was created by the Chicago Board Options Exchange (Cboe) and looks at options prices on the S&P 500 Index. VIX is widely regarded as a definitive measure of investor fear and market volatility. Its construction uses S&P 500 options prices to estimate the market’s risk-neutral expectation of volatility over the next 30 days:

• Below 20 points indicates a calm and stable market, with below 10 to 15 marking exceptionally low volatility or optimism.
• Between 20 and 30 shows rising uncertainty.
• Above 30 signals high fear and stress among investors.

However, VIX is only an indirect measurement using the options market to assess market conditions. A new study by a researcher at the University of Sydney, Australia, shows that option-implied volatility does not carry the same return premium as realized or statistically expected volatility of the equity itself. So it shows that volatility as measured by an index like VIX might not fully represent volatility, as other forms of measurement should complement their analysis.

These findings were published in Journal of Financial Markets¹, under the title “Do different measures of stock market volatility risk have the same price?”

Measuring Volatility

There are several ways to measure market volatility.

The first one is realized volatility, which is backward-looking and reflects historical volatility that has been realized. Thanks to high-frequency data, more precise estimates of ex-post realized volatility can be produced.

A second measurement is option-implied volatility, which is inferred from the index options market. The main advantage of this method is that it is forward-looking and does not assume any particular volatility forecasting model. This is the method used to calculate the VIX.

A third approach is expected volatility, which forecasts how much the market is likely to fluctuate over a future period. In this study, the researcher estimated expected volatility using a model that incorporated previous realized volatility and the VIX.

The study analyzed daily frequency over the sample period from January 1986 to December 2020, and obtained intraday price data on the S&P 500 Index from the Thomson Reuters (TRI ) Tick History database.

While all three methods measure volatility of a market and broadly overlap, when looked at in detail, they differ in their results, reaction to market turmoil, and precision.

“Realized volatility reached an all time high on March 16, 2020 at the beginning of the COVID-19 pandemic, whereas implied volatility peaked on October 19, 1987 (Black Monday) when the S&P 500 Index dropped by more than 20%. Moreover, expected volatility is smoother than implied and realized volatilities”

Source: Journal of Financial Markets

Measured Versus Practical Risk in Equities

In theory, volatility measures like VIX should turn into a measurement of risk in the corresponding equity market. This should itself result in a return premium.

“Average stock returns exhibit a negative and statistically significant relationship with both realized and expected volatility betas. A negative volatility risk premium is consistent with the economic intuition that volatility shocks are viewed as bad and investors are willing to pay a premium for hedging against increases in volatility.”

So the return premium is true for realized and expected volatility. But apparently, option-implied volatility does not carry the same return premium as realized or statistically expected volatility.

“It suggests that equity investors do not necessarily view increases in option-implied volatility as being bad and are unwilling to pay a premium to hedge implied volatility risk.”

This challenges both the perception of VIX reflecting risk and premium in the underlying equity market and brings into question why it differs from other volatility measurements.

Volatility Is Not Financial Returns

The study also examined whether the three volatility measures predicted subsequent aggregate stock-market returns. Realized, implied, and expected volatility were positively but insignificantly related to future market returns.

This result should not be confused with the study’s cross-sectional findings. The paper found that individual stocks with different exposures to realized and expected volatility earned meaningfully different average returns. It did not find that a higher overall level of market volatility reliably predicted where the S&P 500 would move next.

“Realized, implied, and expected market volatilities are positively but insignificantly related to futures stock market returns”.

The difference between option-derivative volatility measurement and other measurements could be consistent with partial segmentation between index options and equity markets.

“Option-implied volatility may not reflect the preferences and beliefs of the average investor because, unlike equity investment, option trading involves significant constraints (high transaction costs and margin requirements) that limit investor participation.”

This would mean that VIX can capture options-specific pressures that equity investors do not price, incorporating into the index shocks that are specific to the options market.

“Option-implied volatility is associated with an insignificant risk premium because equity investors may not want to hedge options market-specific shocks.”

It should also be noted that the study analyzes markets over a long period of time, since 1986. But there is a “dramatic increase” in the correlation between option-implied and stock volatility late in the sample period.

Source: Journal of Financial Markets

By the end of the study period in 2020, equity and options markets appeared considerably more integrated than they had been during the late 1990s and early 2000s. Declining transaction costs and broader participation in options trading may have contributed to this change.

A contributing factor might be that changes in the OTM option transaction cost likely contributed to a better integration of equity and options markets.

Source: Journal of Financial Markets

Investor Takeaway

It is tempting for investors to take one indicator or index and use it as an “absolute” measure of a given characteristic of the market. But as this study demonstrates, a deeper understanding of how an index is created and its true correlation to risk and future returns is what actually matters.

It also highlights how fees and transaction costs can affect market and financial models. As costs decrease with digitalization, and maybe in the future with blockchain technology and tokenization, it is possible that VIX will become even more tightly correlated to the equity risk premium.

In any case, investors should still avoid treating every volatility measure as interchangeable, and prefer more complex but also more accurate models taking multiple inputs to properly assess risks.

Investing in Option-Market Infrastructure

Since its inception in 1971, Nasdaq has focused on new technology, distinguishing it from more generalist stock exchanges like the NYSE. But it has diversified much beyond just tech stocks.

In 2025, more than half of all US-domiciled companies are listed on Nasdaq, with a growing presence abroad thanks to its acquisitions of the now-rebranded Nasdaq Nordic and Baltic markets, making it the #1 in IPO proceeds raised in Europe. Some older companies are also moving their listing to Nasdaq from other exchanges, like Walmart recently did in December 2025.

Source: Nasdaq

Nasdaq also operates six US options exchanges, providing the infrastructure for some of the world’s largest options markets.

It makes it a great company for investors looking to benefit from greater options participation, improved liquidity, and lower trading friction with tighter integration between equity and options markets.

Thanks to key acquisitions like Verafin and Adenza, Nasdaq embeds its tech directly into institutional workflows. This includes AI-powered fraud detection and anti-money laundering (AML) compliance solutions (Verafin) and platforms supporting end-to-end trading, risk management (Calypso), and regulatory reporting (AxiomSL), as well as its trade surveillance and market abuse software SMARTS, trusted by 190+ banks and regulators and 50+ exchanges.

Source: Nasdaq

Overall, Nasdaq is today a company built around the premise that “Data is the New Fuel”, with revenues having grown at a 13% CAGR from 2020 to 2025, and free cash flow growing at a 17% CAGR.

Source: Nasdaq

Feeding this growth is the global reputation of the company, with among its clients 10,000+ corporate customers, 5,000+ institutional investors, 3,800+ financial institutions, and 135+ market regulators, with around 460 clients generating >$1M in revenues yearly.

Overall, Nasdaq is a stock for investors to get exposure to the “plumbing” of the financial systems, including options, as well as key surveillance and regulatory tools & data.

Latest Nasdaq, Inc. (NDAQ) Stock News and Developments

Study Referenced

^{1. Guanglian Hu. Do different measures of stock market volatility risk have the same price? Journal of Financial Markets. 28 August 2026. Article: 101087. 10.1016/j.finmar.2026.101087}