Index provider Standard & Poor’s and TMX Group Inc. (TSX:X) are teaming up to bring a “fear index” to the Canadian stock market with the launch of the S&P/TSX 60 VIX, the two organizations said Thursday.

The new index will seek to measure the 30-day implied volatility of the Canadian stock market using S&P/TSX 60 Index options, which trade on Montreal Exchange. The index is set to launch on Monday, October 18.

VIX is often referred to as the “fear index” as it measures investors’ expectation of stock market volatility for the next 30-day period. Historically, volatility generally has had negative correlations to the stock market and is considered a useful signal to hedge the potential downturn of the broad equity market. While the S&P/TSX 60 Index options have various expirations, the S&P/TSX 60 VIX indicates the implied volatility of the fixed 30-day period.

“The launch of the S&P/TSX 60 VIX complements the S&P/TSX 60, the leading equity index in Canada,” says Srikant Dash, global head of research & design at S&P Indices. “The new volatility index will not only serve as a key metric of market sentiment, but will also foster the development of a volatility trading and hedging market in Canada.”

“We are delighted to provide the Canadian marketplace with a new robust volatility indicator,” adds Alain Miquelon, president and CEO, Montreal Exchange. “Volatility indices — with the CBOE’s VIX methodology as the recognized standard — are used worldwide to measure the expected volatility of the stock market over the next month. Partnering with S&P enables us to give investors a powerful tool to gauge market expectations.”

The S&P/TSX 60 VIX approximates the 30-day implied volatility that is derived by the near-term and next-term options. Options roll to the next-term five trading days prior to expiration. CORRA (Canadian Overnight Repo Rate), 1-, 2-, and 3-month CDOR (Canadian Dealer Offered Rate) rates are used to interpolate the risk free rates of each maturity.