FIX - The Fear Index : Measuring Market Fear

In this paper, we propose a new fear index based on (equity) option surfaces of an index and its components. The quantification of the fear level will be solely based on option price data. The index takes into account market risk via the VIX volatility barometer, liquidity risk via the concept of implied liquidity, and systemic risk and herd-behavior via the concept of comonotonicity. It thus allows us to measure an overall level of fear (excluding credit risk) in the market as well as to identify precisely the individual importance of the distinct risk components (market, liquidity or systemic risk). As a side result we also derive an upperbound for the VIX