Some experts interpret stock market return volatility as an indicator of investor sentiment, with high (low) volatility indicating ascendancy of fear (greed). Volatility of volatility (VoV) would thus indicate uncertainty in investor sentiment. Does the risk associated with this uncertainty depress stock prices and thereby predict strong stock market returns? To investigate, we consider two measures of U.S. stock market volatility: (1) realized volatility, calculated as standard deviation of daily S&P 500 Index returns over the last 21 trading days (annualized); and, (2) implied volatility as measured by the Chicago Board Options Exchange Market Volatility Index (VIX). For both, we calculate VoV as the standard deviation of volatility over the past 21 trading days and test the ability of VoV to predict SPDR S&P 500 (SPY) returns. To avoid overlap in volatility and VoV calculations, we focus on monthly return intervals. Using daily values of the S&P 500 Index since December 1989 and VIX since inception in January 1990, and monthly dividend-adjusted SPY closes since inception in January 1993, all through August 2024, we find that:
Subscribe to Keep Reading
Get the research edge serious investors rely on.
- 1,200+ research articles
- Monthly strategy signals
- 20+ years of backtested analysis
Cancel anytime