Mint Explainer: Understanding volatility in the context of poll dynamics

livemint.com:

Mint unpacks why events such as an election have an outsized and often volatile consequence on the equity markets. Any big event such as election outcomes, the Union Budget, or geopolitical tensions, triggers significant movement in the Vix index, but in the opposite direction. The Vix shares an inverse correlation with the market: rising when the market falls, and vice-versa.

Ahead of India’s first pandemic lockdown, when the benchmark Nifty index plunged 3,600 points to 7,511.10 over 15 sessions through 24 March, 2020, the Vix rose 248% to 87. Monday’s level of the Vix was the highest in 19 months, and way higher than the average of 12.44 in the 2023-24 financial year. The Nifty, which ruled at a record high of 22,794.7 points on 3 May, fell 974 points to an intraday low of 21,821.05 points on 13 May, the fourth phase of the Lok Sabha election.

Over this period, the Vix jumped 60%. Buying by domestic institutional investors enabled the market to stage a smart recovery on Monday, and the Vix closed at a lower level of 20.6. The impending election outcome, to be declared on 4 June, has resulted in nervousness in the market, which had baked in a sweeping victory for the Bharatiya Janata Party-led National Democratic Alliance before polling began on 19 April.

While the ruling BJP had claimed it would win in at least 400 of the 543 Lok Sabha seats (not counting the two seats reserved for the Anglo Indian community), market circles are now pencilling in 300-330 seats for the party. Also read | Investors take cover ahead of election outcome Home minister Amit Shah has said the volatility would abate post the election results on 4 June, and the markets would rally, implying a sweeping victory for the incumbent party. Myriad