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We suggest a methodology for the construction of a set of interest rate volatility indices for the Eurozone (EIRVIXs) based on the implied volatility quotes of caps (floors), one of the most liquid interest rate derivatives. These indices reflect the market's aggregate expectation of volatility of forward rates over both short- and long-term horizons (from 1 to 10 years ahead). Volatility indices in equity markets are referred to as investors' gauges of fear because they usually spike in periods of market turmoil. In this article, we extend the empirical evidence by analysing the effect of the recent financial crisis on short- and long-term EIRVIXs. We find that the level of short-term EIRVIXs (70%) as of April 2012 is still far from returning to the average pre-crisis value (17%) and that the crisis has also affected investors' long-term expectations of volatility. In addition, using two stock return volatility indices for the Eurozone, we find that the crisis has had a deeper impact on investors' uncertainty about the evolution of interest rates than on stock market returns.
