Tuesday, January 17, 2012

EconomPic Data’s VIX and S&P 500 Performance Matrices

Last week, Jake at EconomPic Data took up the subject of the VIX as a Predictor of Equity Returns in a post that examined the daily returns of SPY based on the level of the VIX.

Today Jake has introduced another factor into his analysis in S&P 500 / VIX Matrix, where the performance of both the SPX/SPY and the VIX are evaluated based not just on the absolute level of the VIX, but also based on the performance of the VIX over the prior month.

The results are plotted in two matrices, one for SPX/SPY performance and the other for VIX performance.

Long-term readers of this blog will not be surprised to see that the VIX spike and mean-reverting aspects of the VIX dominate the key takeaways from this table, with high levels of the VIX creating some sweet spots in terms of predictability of future returns for both the SPX/SPY and the VIX.

Also worth noting is a point that I have mentioned here on many occasions in the past: that the mean reversion characteristics of the VIX are much less compelling for a low VIX than for a high VIX.

Finally, it is important to keep in mind not just the number of data points on the chart, but the events that these encompass. A good reference can be found in VIX Sets New Records, Suggesting Volatility Near Peak, which I penned in August 2011. The data in my August post should serve as a reminder that any set of data points which include a VIX of over 50 will be limited entirely to the 2008-2009 financial crisis. In contrast, just moving the relevant bucked down to 48 (on an intraday basis) will capture six other crises from the past two decades and provide enough diversity of experience from which to draw substantially more meaningful conclusions.

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