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.

Full IQS brief:

Comments

[Racer]

I thought the only thing you needed to look at these days was the direction the dollar moved?

from the Computer manual 'Trading Made Simple'

[Countrygenius]

Well said Racer,,, truthfully nothing else matters anymore. All those books written about T/A, value investing, fundamental investing are nothing more than junk now.

The USD and those self help investing books are not worth the paper they are printed on

[Anonymous]

maybe they should do a study on the VIX as a predictor of future returns

[m.g. turner]

Does the VIX Forecast the Direction of the S&P 500?

Intuitively, No. The VIX doesn't cause anything. It's like saying that temperature rising as indicated on a thermometer causes heat.

Boh??