Empirical Observations Of The Correlation Between The VIX And The S&P 500
Innovative Quant Solutions has put together another useful brief on empirical data across various time periods, correlating the performance of the S&P 500 subsequent to moves in the VIX. Curiously, the relationship between the two is not as linear as expected: "The general belief in the marketplace is that downward trending VIX portends increasing S&P 500 while upward trending VIX indicates decreasing S&P 500. Is this true for the short-term? Does the magnitude of the change affect the subsequent returns?" Curiously, and counter-intuitively, sharp, dramatic moves in the VIX lower tend to result in negative S&P returns. More in the brief attached.
IQS provides the following observations:
- The return to the S&P 500 decreases more and more as the VIX trends upwards. When there is an upward spike in the VIX, the S&P 500 is most likely to decrease. Over all time periods, the S&P 500 moves slightly upwards when the VIX trends just a little upwards.
- When the VIX trends downwards just a bit, the return to the S&P 500 is slightly upwards.
- However, the more steeply the VIX trends downwards, the more likely the S&P 500 to have negative returns.
- Large movements in the VIX either upwards or downwards seem to indicate negative S&P 500 short-term returns to follow.