Research

D. Hait: VIX -- Fear of What?

September 1, 2016

The VIX, while promoted as an indicator of future market volatility, has more to do with present and past market returns than future volatility. Most (98.8%) of the daily variation in the VIX can be explained by current SPX returns and lagged VIX values. Unexplained changes in the VIX are more likely due to contemporaneous market reactions rather than fear of future events. Despite its lack of predictive ability, the VIX could be useful as a hedge against bidirectional jump risk.