The VIX – Is It Telling Us Anything? At All?

In the last 5 years several indicators have become extremely popular.  Perhaps none more so than the VIX.  That is, the volatility index.  The VIX is a measure of implied volatility for the S&P 500.  It’s also known as the fear gauge as it has a tendency to correlate decently with big moves in the market.   The only problem is that this index doesn’t tell you much except in rather extreme environments.   In fact, that might even be a stretch.

Anyhow, I was intrigued by these comments in a JP Morgan note recently which state that current economic indicators are consistent with much higher volatility (using a 100 year average):

“To compare the current VIX levels to macro fundamental risk, we have performed a simple quantitative exercise: we compiled a list of 484 macro indicators published by Bloomberg that have a significant correlation to the VIX index and regressed them against the current reading of the VIX. Results show that the current low VIX level is in stark contrast to virtually every macroeconomic indicator across the globe. These indicators include PMI, GDP, payroll and unemployment, housing, retail sales, consumption, inventory, business and consumer confidence, delinquencies, and other economic activity indicators. The 81 US macro series point to a VIX level on average 7.2 points higher, the 214 European indicators point to a VSTOXX level 9.7 points higher, and the 186 Asia economic indicators point to a VNKY level 8.9 points higher (Figure 8). While these results don’t signal an imminent increase in the VIX, they do point to a large discrepancy between the market volatility and macro fundamentals. As we do not think that the macro environment will drastically change over the next year, we believe risk for market volatility is to the upside.”

Don’t call me skeptical.  Call me more of a reversion to the mean kind of guy.  A brief glance at a 20 year chart of the VIX shows that we could actually go a lot lower in this index and that we’re still very much in an environment of persistent fear.  So I say wake me up when this index does something that sends us shooting (in either direction) away from the mean.  As opposed to what looks like a big coin flip here….After all, the fun in mean reversion is gone once we’re sitting right at the mean…


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. This finding basically means that QE has replaced economic reality as a pricing factor into risk assets and has created a fake level of security and thus complacency. But the question as always is – what is the timing for a mean reversion back to reality as a pricing factor?

  2. What do you mean that it can go even lower – dont have this series data but long term mean seems to be around 21/22 i.e., currently we are on average 5/6 points below the long term average.

  3. Some theories I encountered to explain the vix so far
    1. Vix term structure shows that long dated vix contract is priced higher now then during the lehman collapse. The short term contract is lower meaning that investors fear a selloff at a later date but not today
    2. The mean reversion theory
    3. Warsh (ex Fed governer view) – that QE and low interest rate policy is distorting the market price for risk (both credit risk + asset/equity risk). [The Merton model would be the mechanism for how yields impact Vix and option pricing. Also if you are looking for a more analytical treatment then read the headaching inducing vol papers by Artemis capital]

    Honestly I don’t claim to understand this myself nor which view is correct but to me it appears that 90% of wall street is as mindless as they were during the bubble that formed during the sub prime crisis if Bernanke put is indeed as I’m speculating creating a bubble in credit (and asset) risk.

  4. Vix has been neutered by central banks intervention. What is more a cause for concern is that the fall in volatility is tied to rising asset class correlations.



  5. IMHO, the performance of the VIX has been altered by those trying to use it as a hedging mechanism–i.e., long stocks, long VIX–the ides being that falls in the stock market have coincided with sharp increases in volatility. Somehow I can’t get the idea out of my head that the next decline will be slow and sans fireworks, just to mess with this strategy.

  6. Should also note the seasonal factor: barring really bad news (Mayan calendar hijinks, anyone?) the volatility indices tend to decline considerably from November into the festive season, going practically comatose post-Xmas and only picking up post-New Year.

  7. For a better read on volatility that might affect trading, and in conjunction with one of whatisgoingon’s points, pull up a relative performance chart of e.g. VXZ/VXX; a falling ratio generally indicates potential turbulence at hand as the shorter term VXX rises faster than the longer term VXZ. Conversely, a rising ratio tends to signal the all-clear with the VXX dropping faster than VXZ.

  8. Only problem with your theory is that you can’t go long VIX. To influence VIX you’d have to influence the options on which it’s value is calculated which is far more complicated than just buying an ETF or futures contract.

  9. I think a problem with measuring implied volatility months out is that a lot of trading is nowadays going on in the front-month and weekly options so it’s harder to efficiently value the longer dated contracts because there isn’t much trading (and therefore consensus on fair value) going on.

  10. I dont see any charts here other than the 20 year chart of the VIX?

    The article talks about other charts

  11. Agreed. I didn’t understand that part either. The long-term average on the VIX is around 20.

  12. If you are trend trending currencies, I have found it best to stay out of the market when vix is low.

  13. How about the Normalized Z scores from the average..Would help a lot to see actual Range VIX moves when not “stressed”