The Securities and Exchange Board of India (SEBI) on Tuesday allowed stock exchanges to construct a volatility index and disseminate it to the market.Exchanges are free to adopt any volatility index computation models or can develop their own model, SEBI said in a statement.

A volatility index is a measure of market expectation of near term volatility conveyed by prices of stock index options or a basket of options on stocks. The index is considered some kind of indicator of market sentiment, according to SEBI.

It said based on the experience and awareness generated, derivatives on volatility index can be considered for introduction in due course of time.