A Short-term VIX Trading Strategy That Works?
July 12, 2006 - Size Effect, Volatility Effects
Can you trade on the CBOE Volatility Index (VIX), the “investor fear gauge,” or not? If so, what should you trade and should your trades be short-term or long-term? In their September 2005 paper entitled “VIX Signaled Switching for Style-Differential and Size-Differential Short-term Stock Investing”, Dean Leistikow and Susana Yu test the usefulness of VIX level as a signal for short-term switching between: (1) value and growth stock indexes; and, (2) small-capitalization and large-capitalization stock indexes. They note that “…VIX can be viewed as a market-determined forecast of short-term market volatility that, by construction, has a constant one-month forecast horizon.” They determine signals according to whether VIX is high or low compared to its 75-day moving average. They examine index returns for 1 day and 5 days after a VIX signal. Using data for the VIX and for various Standard & Poor’s and Russell stock indexes from the early 1990s through 2004, they find that: Keep Reading