The VIX index is an effective measure of volatility expectations. The CBOE VVIX index measures the volatility of volatility for the VIX. If the volatility of volatility is increasing, there should be the expectation that volatility itself should also be increasing. We are seeing that the ratio of the VVIX to VIX is at high levels. Granted the VVIX index is off from recent highs, but the VIX index has continued to move lower even with the heightened policy uncertainty we have discussed in the past with our post on the one chart to look at for the new year.

Obviously when there is an elevated volatility ratio, it can return to normal through either a decline in the VVIX index or an increase in the VIX. Our view is that the change in US administration will continue to generate policy uncertainty as measured by the policy uncertainty index and thus the VIX should increase even if the volatility of volatility stays at current levels.