We have run a correlation analysis of two of our equity volatility indices, HIXX? and KIXX? with their respective (underlying) equity indices for a period of roughly one calendar year, from 4th March 2004 to 29th March 2005.

The results are quite as expected. The correlation between HIXX? and Hang Seng Index (Hong Kong equities) is -0.7667 (minus 0.7667) and the correlation between KIXX? and the KOSPI index (Korean equities) is -0.7763 (minus 0.7763).

The strong negative correlation between the equity volatility index and the underlying equity index is what is empirically expected. Volatility, or more specifically implied volatility derived from index option prices, are inversely correlated with the value of the equity index. In general, empirical evidence shows that the implied volatility of a stock should be inversely proportional to the stock price.