VIX and Future Stock Market Returns

Experts and pundits sometimes cite a very high (low) Chicago Board Options Exchange (CBOE) Volatility Index (VIX), the options-implied volatility of the S&P 500 Index, as an indication of investor panic (complacency) and therefore of a pending U.S. stock market advance (decline). However, a more nuanced conventional wisdom has evolved in recent years that considers both very high VIX and very low VIX as favorable for future stock market returns. Do data support belief in either the original or evolved conventional wisdom? To check, we relate the level of VIX to S&P 500 Index returns over future horizons of 5, 10, 21 and 63 trading days. Using daily and monthly closes for VIX and for the S&P 500 Index over the period January 1990 through (most of) October 2011 (about 262 months), we find that: (more…)