Stock Market Performance Around VIX Peaks
May 20, 2016 - Sentiment Indicators, Volatility Effects
Do peaks in the S&P 500 Implied Volatility Index (VIX) signal positive abnormal U.S. stock market returns? If so, can investors exploit these returns? In the May 2016 version of his paper entitled “Abnormal Stock Market Returns Around Peaks in VIX: The Evidence of Investor Overreaction?”, Valeriy Zakamulin analyzes U.S. stock market returns around VIX peaks. He employs two formal methods to detect peaks:
- When a local maximum (minimum) is at least 20% higher (30% lower) than the last local minimum (maximum), it is a peak (trough).
- First, identify all local maximums (peaks) and minimums (troughs) within 8-day windows. Then winnow peaks and troughs and systematize alternation by: excluding peaks and troughs in the first and last 20 days; eliminating cycles (peak-to-peak or trough-to-trough) shorter than 22 days; and, excluding phases (trough-to-peak or peak-to-trough) shorter than 10 days, unless daily percentage change exceeds 30%.
He then tests for abnormal stock market returns around VIX peaks and during preceding and following intervals of rising and falling VIX. Abnormal means relative to the average market return for the sample period. Finally, he investigates whether abnormal returns around peaks are due to investor overreaction. Using daily closes for VIX and daily returns of the broad capitalization-weighted U.S. stock market during January 1990 through December 2015, he finds that: Keep Reading