VIX level shows little relationship with S&P 500 future returns; R-squared is 0.003 at 5 days and exceeds 1% only at 126 days (0.036) (Jan 1990–Sep 2022; daily closes; non-overlapping intervals; in-sample, descriptive; not a trading test).
Market commentators sometimes cite a high Chicago Board Options Exchange (CBOE) Volatility Index (VIX), the options-implied volatility of the S&P 500 Index as an indicator of investor sentiment and therefore a contrarian signal for the stock market. Specifically, a relatively high (low) VIX indicates panic (complacency) and therefore pending stock market strength (weakness). Does evidence support such conventional wisdom? To check, we relate the level of VIX to S&P 500 Index returns over the next 5, 10, 21, 63 and 126 trading days. Using daily closes for VIX and the S&P 500 Index during January 1990 (limited by the VIX series) through September 2022, we find that:
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