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Stock Market Performance Around VIX Peaks

| | Posted in: 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:

  1. When a local maximum (minimum) is at least 20% higher (30% lower) than the last local minimum (maximum), it is a peak (trough).
  2. 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:

  • Regarding falling (peak-to-trough) and rising (trough-to-peak) VIX phases:
    • The average falling phase is 1.4 time longer than the average rising phase.
    • The average increase (decrease) in VIX over a rising (falling) phase is 50% (-30%).
    • The average daily stock market return during a rising (falling) phase is -0.26% (0.25%), with relatively high (low) standard deviation of returns and negative (positive) return skewness.
    • The average cumulative return over a rising (falling) phase is -4.5% (6%).
  • For intervals just before and after VIX peaks (see the chart below):
    • During the week before peaks, average daily abnormal stock market return is negative and exponentially decreasing to a minimum -1.51% on the peak day. Average cumulative abnormal return reaches a minimum -4.71% on peak day.
    • During the week after peaks, average daily abnormal stock market return is highest (0.83%) the day after peak and exponentially decreasing toward zero. Average cumulative abnormal return increases but remains significantly negative compared to pre-peak level.
    • For peaks above (below) median height, average cumulative abnormal return on the peak day is -6.59% (-2.88%), and the residual average cumulative abnormal return 10 trading days later is -2.43% (-1.53%).
    • Small and growth (large and value) stocks have relatively larger (smaller) drawdowns up to a VIX peak and have more (less) negative residual average cumulative abnormal returns 10 trading days later.
  • Tests indicate that return effects around VIX peaks are largely attributable to investor overreaction to bad news, with subsequent correction.
  • Findings are generally robust for two subsamples of equal duration and are qualitatively similar for changes in values of the parameters of the peak identification methods.
  • Exploitation of post-peak abnormal returns is problematic because: (1) VIX peaks are identifiable only with some delay; and, (2) post-peak abnormal stock market returns persist only about five trading days.

The following charts, taken from the paper, track average abnormal daily (upper chart, AR) and cumulative (lower chart, CAR) stock market returns from 10 trading days before through 10 trading days after VIX peaks over the entire sample period. Shaded areas indicate 95% confidence intervals for average abnormal returns. Average daily abnormal returns are statistically different from zero during the seven days before the VIX peak (which is Day 0) through five days after the VIX peak. Average cumulative return decreases smoothly through Day 0 and increases smoothly thereafter (but does not return to its pre-event level).


In summary, evidence indicates that investor overreaction to bad news generates VIX peaks, after which U.S. stock market returns are abnormally positive. However, the lag in peak identification methods confounds exploitation.

Cautions regarding findings include:

  • As noted, abnormal returns are not exploitable via the VIX peak identification methods used in the paper.
  • Moreover, returns are gross. Bid-ask spreads are likely very high around VIX peaks, further confounding exploitability.
  • The study does not address abnormal returns for VIX futures and associated exchange-traded products around VIX peaks.
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