Tuesday, January 23, 2007

A Challenge to Two Things You Think You Know About the VIX

From Jason Goepfert via the virtual pen of Steve Sjuggerud and archives of Investment U and comes several VIX-related ideas that are worth mulling over 1 ½ years after they were published.

Goepfert, who heads up Sundial Capital Research and sentimenTrader.com, attempted to reconstruct what historical VIX data might have looked like if it were possible to simulate VIX readings all the way back to 1900. In this manner he developed what he calls a Faux-VIX that looks back over a century. As described by Sjuggerud, Goepfert determined that while current VIX readings look quite low by the historical standards that cover two decades of official CBOE VIX/VXO data, looking back to 1900 with the Faux-VIX, it appears that volatility readings below the current 11 level happen approximately one third of the time.

Further, and consistent with the initial post in this blog, Goepfert concluded that sustained periods of high volatility tend to alternate with lengthy periods of low volatility in cycles which average approximately five years. Much to my surprise, Goepfert then concludes that “buying the first large spike in volatility has paid off time and time again.” This contrasts sharply with my current thinking, which favors capitalizing on the mean-reverting tendencies of the VIX by fading large volatility spikes.

In future commentary, I will examine the degree and duration of various types of volatility spikes and return to Goepfert and the fade-or-buy-the-spike debate.

Note: For those who may be interested, Goepfert is a frequent contributor to Minyanville.com and archives of his articles on that site can be found here.

2 comments:

ryan'd dad said...

Hi ,

I do agree with you that the vix is excellent as a mean reverting tool. Pin pointing short term extremes is very effective when applying moving averages and rsi and other oscillators to the vix. But I think it is most useful in the short term alone. Long term it is much more difficult to game.

Kristen said...

Hi , I do agree with you that the vix is excellent as a mean reverting tool. Pin pointing short term extremes is very effective when applying moving averages and rsi and other oscillators to the vix. But I think it is most useful in the short term alone. Long term it is much more difficult to game.

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