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Survival Guide
Greek Edition
Trust in the Greek economy is gradually being restored

By Professor Nikolaos Philippas*

The delay in releasing countries' macroeconomic variables (GDP, unemployment, investments etc) creates a significant gap in short-term information, leading to difficult decision-making as far as market participants – companies, institutional and private investors, but also countries – are concerned, since they should take into consideration the rapid changes and developments occurring in money and capital markets. This reality, the result of financial markets' predominance over real markets, led to the necessity to create indices that could cover this gap and effectively reflect future developments (leading indicators), as well as, inter alia, investors' short-term sentiment.

Additionally, the speed and plethora of available information in today’s globalized financial and economic environment creates the need for concentrated information that could be used immediately and efficiently.

Moreover, due to the the modern economic reality’s high volatility, it is necessary to systematically study and record a measure able to depict the markets existing uncertainties which usually reflect those of the real economy. In modern literature these indices act as strong information and strategic tools to that intent.

A major contribution in the indices field was the implementation of the CBOE Volatility Index (VIX), introduced in 1993 by Professor Robert Whaley as a benchmark for the US equity market’s short-term volatility. This index was then used, inter alia, to create derivative financial instruments to achieve appropriate market hedging strategies. Finally, a historical comparison of the index level provides useful understanding of market trends, as well as those in the economy in general.

It should be noted that the VIX Index is widely recognized as an investors' sentiment barometer and has been empirically proven to have significant explanatory power in the valuation of shares and other securities, as well as in herd behavior interpretation (Philippas et al., 2013). The VIX Index has been described and defined as an “investor’s fear gauge” by many scientific studies (Whaley, 2000, 2009; Giot, 2002; Simon, 2003; Skiadopoulos, 2004) and has been used by traders as a sentiment index (Kurov, 2010; Baker & Wurgler, 2006).

The VIX Index manages to successfully interpret the influence of sentiment on US securities valuation. Therefore, subsequent respective indices were created for the entire European stock market (EURO STOXX 50 Volatility Index), as well as for separate stock markets with such indices as the AEX (Amsterdam), CAC40 (France), FTSE100 (United Kingdom), DAX (Germany), NIKKEI 225 (Japan) and others.

KEPE creates a volatility index for Greece

The Center of Planning and Economic Research (KEPE), in collaboration with the University of Patra and Professor Constantinos Syriopoulos, Dr Thanasis Fassas, a lecturer of City College, and KEPE’s research team (Dr A. Tsouma and Dr F. Oikonomou), created an original index estimating volatility and investors' uncertainty (fear) regarding the Greek stock market and by extension the Greek economy.

This index will be called KEPE GRIV (KEPE Greek Implied Volatility). For historical and continuity reasons it has been calculated since 2004 and will be from now on calculated and communicated by KEPE.

The KEPE GRIV Index is an implied volatility index and is calculated for the FTSE/ASE Large-Cap Index, based on the official new methodology used by the Chicago Board Options Exchange (CBOE). This methodology is systematically being used for the first time for a regional emerging market such as the Greek one. Despite the possible disadvantage related to the Greek derivatives market’s low trading volume, this index provides very useful information.

A high index price indicates a major uncertainty in the economic and social environment and future short-term volatility in the stock market. Of course the higher the price, the higher the market uncertainty (fear), hence share prices might experience sudden changes. On the other hand, the lower the price, the lower the uncertainty, and the more short-term trust in the system is restored.

The purpose of the index is to be the main benchmark for short-term volatility in the Greek stock market, for uncertainty and trust (or not) shown by domestic and foreign investors in the Greek economy, as reflected in derivative products prices, while providing useful information on the domestic as well as international markets.

The important feature that makes this index a particularly useful tool, not only for investors, is the fact that it refers to short-term volatility (of the next 30 days) which is expected by investors participating in the derivatives market. That is to say, it is an index aiming directly into the near future, which constitutes a barometer of investor sentiment, while it can also be used in risk management models and securities valuation.

KEPE GRIV Index trend historical analysis

As shown in the chart below, from 2004 to the Lehman Brothers collapse, the index remains low, below the period’s average (2004-11/2013), with its lowest price marked on November 30, 2005, at 14.19 percent.

With the global financial crisis outbreak, the index climbed to higher levels, reflecting the overall domestic and international sentiment of uncertainty. Domestic events following the period 2009-11 (downgrades by rating agencies, the former government’s inaction regarding reforms etc) led the index to especially high levels, reflecting the Greek economy’s particularities. The index hit an all-time high (85.44%) on October 11, 2011 (as opposed to VIX, which hit its highest price in November 2008), during a period of major strikes in Greece, five days after the submission of the omnibus bill concerning public sector pay and evaluation, the reduction of main and supplementary pensions, reductions in retirement lump sums, the new tax scale and labor reforms, as well as in the event of the first bank collapse and nationalization (Proton Bank) during the debt crisis.

During the election period from May to June 2012, the index hit its second all-time high from 2004 due to increased uncertainty, political risk and the fact that international investors considered the possibility of a Greek exit from the euro as high. This period’s index price reached 78.35 percent on June 15, 2012, while the Greek stock market had dropped on June 5, 2012, to 476.36 points. During this same period the Greek 10-year bond spread rocketed to 29.81 percent on May 31, 2012 – unrealistic for an EU country and indicating in the strong fear of investors. After the elections and with the stabilization of the political situation, the stock market’s general index gradually recovered. The FTSE/ASE Large Cap Index trend was similar as well.

On September 30, 2013, the KEPE GRIV reached 39.25 percent. This means that the Greek economy’s uncertainty, as reflected by derivatives market participants' expectations, was reduced to a half since 2012 elections, back to 2009 levels, that is at pre-Support Mechanism and Memorandum levels, near the index historical average for the period 2004-11/2013.

The significant drop of uncertainty (“fear”) index confirms that investors' confidence is rebalancing in terms of the Greek economy and domestic market, and that this confidence will strengthen even further with the maintenance of political stability and the completion of reforms. The stabilization of the Greek stock market near 1,200 points for the last two months and the Greek 10-year bond spread declining near 700 points – a 2010 level – reinforces all the above.

The systematic KEPE GRIV Index recording and monitoring will be a useful tool for domestic and foreign investors, portfolio managers, analysts and policymakers as it offers a scientific approach to Greece’s short-term investment sentiment, as well as its temporal evolution.

* Professor Nikolaos Philippas is board chairman and scientific director of the Center of Planning and Economic Research (KEPE).

The KEPE GRIV Index for the Greek Economy and most important
crisis events (1/2004-26/11/2013)

Source: Center of Planning and Economic Research.


Baker, M., Wurgler, J., 2006. “Investor sentiment and the cross-section of stock returns.” The Journal of Finance 61, 1645-1680.
Baker, M., & Wurgler, J., 2007. “Investor Sentiment in the Stock Market.” Journal of Economic Perspectives, 21(2), 129-152.
Bandopadhyaya, A., & Jones, A. L., 2006. “Measuring investor sentiment in equity markets.” Journal of Asset Management, 7(3), 208-215.
Banerjee, P. S., Doran, J. S., & Peterson, D. R., 2007. “Implied volatility and future portfolio returns.” Journal of Banking & Finance, 31(10), 3183-3199.
Brown, G. W., & Cliff, M. T., 2004. “Investor sentiment and the near-term stock market.” Journal of Empirical Finance, 11(1), 1-27.
Fassas, A., & Siriopoulos, C., 2012. “The efficiency of VIX futures market: A panel data approach.” The Journal of Alternative Investments, 14(3), 55-66.
Giot, P., 2002. “Implied Volatility Indices as Leading Indicators of Stock Index Returns?” Working Paper, CORE, University of Leuvain.
Giot, P., 2005. “Relationships between implied volatility indexes and stock index returns.” The Journal of Portfolio Management, 31(3), 92-100.
Kurov, A., 2010. “Investor sentiment and the stock market’s reaction to monetary policy.” Journal of Banking & Finance 34, 139-149.
Lee, W. Y., Jiang, C. X., & Indro, D. C., 2002. “Stock market volatility, excess returns, and the role of investor sentiment.” Journal of Banking & Finance, 26(12), 2277-2299.
Philippas, N., Economou, F., Babalos, V. & Kostakis, A., 2013. “Herding behavior in REITs: Novel tests and the role of financial crisis,” International Review of Financial Analysis 29, 166-174.
Simon, D.P., 2003. “The Nasdaq volatility index during and after the bubble.” The Journal of Derivatives 11, 9–24.
Siriopoulos, C., & Fassas, A., 2013. “Dynamic relations of uncertainty expectations: a conditional assessment of implied volatility indices.” Review of Derivatives Research, 16, 233-266.
Siriopoulos, C., Fassas, A., 2012a. “An investor sentiment barometer ― Greek Implied Volatility Index (GRIV).” Global Finance Journal 23(2), 77-93.
 Siriopoulos, C., Fassas, A., 2012b. “The information content of VFTSE.” Working paper, University of Patras.
Siriopoulos, C., Fassas, A., 2009. “Implied volatility indices – a review.” Working paper, University of Patras.
Skiadopoulos, G., 2004. “The Greek implied volatility index: Construction and properties.” Applied Financial Economics 14, 1187-1196.
Solt, M. E., & Statman, M., 1988. “How useful is the sentiment index?” Financial Analysts Journal, 45-55.
Szado, E., 2009. “VIX Futures and Options – A Case Study of Portfolio Diversification during the 2008 Financial Crisis.” The Journal of Alternative Investments 12 (2), 68-85.
Whaley, R. E., 2000. “The investor fear gauge.” The Journal of Portfolio Management 26(3), 12-17.
Whaley, R.E., 2009. “Understanding the VIX.” Journal of Portfolio Management 35, 98-105.
Philippas N., “Investing with a Sentiment Index” (“Επενδύοντας με δείκτη το συναίσθημα”), www.euro2day.gr , 29/8/2012.

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