What Has Driven The VIX Higher In The Past?

Tyler Durden's picture

A nervous peace prevails in the financial markets as central banks sit on their throne, fingers at the ready on the liquidity switch. As UBS' Bhanu Baweja notes, most volatility buyers have been 'rolled' into their graves. As they have explicitly targeted risk premia in addition to rates, a lot more hangs on the monarchs of monetary policy today than it has in previous cycles. While growth and inflation are both low, they are not necessarily uncertain; and although every crisis is different, certain patterns tend to repeat and certain events have reliably driven volatility higher.

What has driven VIX higher in the past

Valuation bubbles popping: the Great Depression was by far the largest volatility event of the last century and although the causes of the depression are controversial the asset valuation bubble and the stock market crash that followed are not. More recently we have seen the dot com bubble and sub-prime crisis bubble cause much smaller volatility spikes. While we can't say with any conviction that any market is already in bubble state, we are watching the high yield credit market and China property market most closely.

Fed surprise rate hike: in February 1994 the Fed raised rates from 3% to 3.25%, the first hike for five years. The effect on markets and volatility was actually larger for the second hike to 3.5% in March. The S&P 500 fell 10% and VIX rose from 9.9% to 23.9%. VIX rose again in June 2004 when Greenspan hiked from a much lower starting level of 1% increasing the Fed funds rate by 2 percentage points per year until he handed the reins to Bernanke. We think that US wage inflation surprises may well lead the Fed to hike sooner and faster than markets expect and this would end the low-volatility regime.

Middle East War and Oil: following the Yom Kippur war in 1973 Arab states reduced production and increased the price of oil by 17% and announced an embargo on oil exports to the United States. The spike in oil price drove down US share prices and drove volatility higher. Although oil futures positioning is at a record high we do not expect current events in Iraq will cause an oil spike.

Politicians: although the track record for reducing volatility is poor for politicians their ability to increase volatility is considerably better. These could be classified as the three D's: disease (Eisenhower's heart attack in 1955), death (Kennedy's assassination in 1963) and dishonour (Nixon's departure after Watergate in 1974). Unfortunately the three D's are not predictable.

Flash crashes: in 1962, long before the existence of programme trading, algorithmic trading, dark pools or "Flash Boys" there was a severe and inexplicable one-day market crash. This happened on May 28th and quadrupled realized S&P 500 volatility from 10% to 40% with a one-day Dow Jones fall of 5.7% and S&P 500 fall of 6.7%. The SEC tried to find the cause of the crash but could not. A similar event occurred on Black Wednesday in October 19, 1987 and again on May 6th 2010, although this was less severe. Flash crashes are inherently unpredictable.


Source: UBS

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So it seems we are potentially 5 for 5... good reason to BTFATH!!?

But low volatility can last (and has lasted) a long time...

chart shows the average time it takes, in days, for VIX to revert to
its long-term average of 20.1% given the value of VIX today

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AccreditedEYE's picture

Stop tryin' to jinx my short Vol trade... working nicely today I might add.

Pool Shark's picture



"We think that US wage inflation surprises may well lead the Fed to hike sooner and faster than markets expect and this would end the low-volatility regime."


[takes breath]


[catches breath]

So,... all these illegal immigrants pouring across the border will be demanding $25/hour wages with full benefits?


Al Huxley's picture

I wonder if UBS did the math on what happens to the interest expense on a 17 trillion dollar debt that has to be continually rolled, in the event that the Fed decides 'to hike sooner and faster than markets expect'. 


Because if they did do the math, then why would they still think it's a policy option that's available to the Fed?

Dr. Engali's picture

They know the math, but they aren't going to come out and start telling the truth now. They'll continue to pretend like the fed has options to help advance the lie.

NoDebt's picture

I woke up in a cold sweat the other night.  Bad dream.  The Fed had begun hiking rates, but they started up QE again at the same time.

Mortgages were 8%, car loans were 12%, but USTs were still yielding 2.70% and Savings Accounts were still paying 0.0000001%.

You dig?

ENTP's picture

Nah, in the future, you will pay your savings account.


If the concept of negative rates doesn't compute with the public at first, the PhDs will jawbone until it does compute.

NoDebt's picture

Auntie M, it's a twister!  A VIX twister!

When the wheels fall off next time, we will definitely not be in Kansas any more.

NOTaREALmerican's picture

Who could have known there was so much to VIX.

I love VIX.

knukles's picture

Come to think of it, if one ran out of Sterno, could one squeeze anything out of Vicks with an old sock?
Semper Fi

knukles's picture

Being frightened.
See, VIX is not a symmetrical measure of volatility.  It drops when it's fun volatility and goes up when it's sad volatility

"Have a gooooood day"

JenkinsLane's picture

Simon Potter and Kevin Henry not being employed by the NY Fed.

ronron's picture

if obozo had a VIX it would look like this.

Dr. Engali's picture

Add a fourth D to politicians for Dunce, because I think we have the grandaddy of them all in the White house.

orangegeek's picture

Fed doesn't control the bond market - this will be their undoing


Tenshin Headache's picture

So if I'm reading that correctly, it is likely to take somewhere between 0 and 600 days for VIX to return to its average value of 20 from where it is today (12).

Dragon HAwk's picture

That Chart is an Optical Illusion Right.. you keep staring at it and all of sudden it makes perfect sense ? my eyes and head  hurt from trying to figure out what it's trying to say..

Al Huxley's picture

Now that the VIX is a policy tool rather than an actual metric, I don't think it's a good idea to apply past experience to try and guess future behavior.  I think betting on it going sub 5 is probably safest.

Turin Turambar's picture

VIX is a manipulated fraud.  It took me a while to learn that lesson, and it wasn't a cheap one.  >$100k loss via TVIX and UVXY.  In hindsight, I was such an idealistic fool actually thinking that the market was a market and not some rigged game.  If I had it to do over again, I'd have made over $1 million shorting UVXY and TVIX.  Sadly, I no longer have the cajones to try it because the collapse could come tomorrow or in two years imo.  :-

samcontrol's picture

Hi Turin,

I think we share similar experiences , i got hit for around 30k on UVXy and vix options.

Realized it was rigged and bought SVXY . Held it for a year and got my money back... i also lacked the balls to buy it again father being called out.

I went all retard in silver options about a month ago and they are all up over
100%......buying more land in Uruguay..

PS. VAMOS ARGENTINA cajaro mierda !!
Quiero un maracanazo Alemán.

samcontrol's picture

some guy here mentioned he preferred hockey over Football.

Dude try to imagine the feelings of that miracle game the US won over USSR. Multiply that by 10 for starters ..
Include more than 300 nations competing to enter a small tournament where adults try to play 7 games and try to fulfill the only dream they have had as a child and win the World Cup for their country.
A few more generations of Latin players and the US might be able to start to compete for real. Klinsman said it, " I don't understand why they didn't attack with that furry at the beginning of the game " .
Future Us players should interview with Macherano.

Turin Turambar's picture


Good for you on the options.  I'm gunshy on paper metals, so I'll be sticking to physical.  Good idea on the land in Uruguay.  I've spent some time in Punta del Este and really enjoyed it.  Montevideo was nice, also.  I'm mulling over some land in S. America, but I can't really decide on where.  Chile, Peru, Argentina, and Uruguay all seem like good options to me. We'll see...  I've still got some more real  estate to unload before the bubble pops.. again.  :-O