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Use Short-term S&P 500 Index Indicators to Predict VIX Futures?

July 8, 2024 • Posted in Equity Premium, Volatility Effects

Does the S&P 500 Index (SPX) or the CBOE Volatility Index (VIX) yield better short-term trading signals for stocks and VIX futures? In the May 2024 revision of his paper entitled “Chicken and Egg: Should you use the VIX to time the SPX? Or use the SPX to time the VIX?”, Robert Hanna explores mutual predictive relationships between SPX and VIX, with an eye toward exploitation via market timing strategies. He considers several long-term trend indicators to investigate whether SPX or VIX data offers better SPX return predictions. He considers two types of short-term overbought/oversold predictive rules: (1) short-term relative strength index (RSI) readings of 2, 3 and 4 days; and, (2) short-term high and low readings of 5 to 25 days in length. He applies both sets of short-term rules separately to SPX and VIX to predict movements of SPX and VIX futures. Using daily SPX and VIX levels since 1990 and short-term VIX futures prices since 2007, all through 2023, he finds that: (more…)

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