A “Vixing” Puzzle allocation would even exceed 100% when the market’s Equity volatility has been unusually low for much of 2017. realized volatility is below the targeted volatility. On the The Volatility Index (VIX), which measures the implied other hand, as volatility ticks up, the equity allocation volatility of S&P 500 Index options and has been viewed would be scaled back. as a barometer of equity market volatility, has drifted to all-time lows. Over a span of more than 7,000 sessions While these strategies have enjoyed strong returns during going back to the start of 1990, the VIX Index’s average this stretch of progressively lower equity volatility, they and median closing values have come out to 19.4 and 17.6, may be planting the seeds of a market correction. Market respectively. It was a rare occurrence for the VIX to makers and dealers on the other side of the growing short collapse below 10 — there were only 9 such occasions out VIX trades would need to employ various S&P 500 option of 6,802 trading sessions prior to 2017, or 0.13% of the strategies to hedge their long VIX positions. There is the times. Year-to-date in 2017, however, there were already concern that a decline in the S&P 500 Index could trigger 35 sessions with the VIX closing below 10. adjustments to these hedging positions that would exacerbate the market decline. Similarly, should volatility Another way to look at the lack of volatility is to tally the suddenly spike up, the aforementioned volatility control number of trading sessions when the S&P 500 Index had strategies would be cutting equity exposures a daily change of more than 1% in either direction. There concurrently, which could amplify the market decline were only 8 such sessions so far in 2017, compared to 48 similar to the downward selling pressure that the so- and 72 such occasions in 2016 and 2015, respectively. called portfolio insurance products generated during the crash of 1987. We wonder if any investors and regulato