Mar

17

VIX Doesn’t Work as Signal for U.S. Stock Returns, Birinyi Says

March 17 (Bloomberg) — Investors looking for clues about the U.S. stock market should probably ignore the Chicago Board Options Exchange Volatility Index, according to a study of the VIX by Birinyi Associates Inc.

Speculation that equity returns will be positive after the volatility gauge decreases and negative when it climbs has little basis in fact, Birinyi said. "The VIX is alleged to be an indicative indicator and has become a staple of analysts and journalists alike," Laszlo Birinyi and analyst Kevin Pleines wrote in a report to clients.

The following is a table of the S&P 500's average gain or loss during periods after implied volatility climbed above or fell below the 50-day average: (since September 2003)

                      1 Month     2 Months     3 Months    6 Months

VIX 20% Below   0.09%       -0.49%        3.33%       5.84%

VIX 20% Above   1.25%        0.50%        0.95%      -4.51%

Source: Birinyi Associates

Larry Williams writes:

As I have always postulated, the VIX is just the Dow/S&P upside down. It's hard to predict A with A.

Jason Goepfert comments:

I'm not a VIX fanboy by any means, but that article was ridiculous. It only looked at returns since September 2003. And it only tested a strategy of crossing 20% above or below the 50-day average. Why 20%? Why the 50-day average? Why just since September 2003? Did they test anything else? Or is that the one they found that supports their (so far very correct) bullish view?

The ridiculous part is taking such a weak study and then proclaiming "the VIX doesn't work."

Allen Gillespie adds:

He doesn't have enough bins — bins of 5 show something different.

Kim Zussman writes:

  1. Volatility was extinguished by fiat liquidity
  2. The only double-dippers left are Jibao, Roubini, and Michael Moore
  3. Nothing to fear above moving averages

These two articles might shed more light on the above points #3 and #2.

Marlowe Cassetti responds:

I have always doubted the assertion that VIX is a measure of market fear and greed. Years ago I read Whaley's academic paper and I was not satisfied with the author's fear/greed connection. To me VIX is simply the volatility number you plug in to make the Black-Scholes option equation work.

Bud Conrad answers:

My detailed review of VIX concluded that the VIX followed stocks (inversely) a day later. It was not predictive. Longer term charts seemed to indicate opposite movements, but the data could not be used as expected.


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