In recent years, the VIX – aka the volatility index, aka the fear index – has become a popular tool among investors who are looking to gauge market sentiment, and ultimately use it to predict the direction of the markets.
However, Tobias Levkovich – Citi’s top U.S. equity strategist – did some research and found that the VIX might have very little predictive value. Furthermore, he argues that even if it had predictive powers, it would offer no advantage since VIX data is so widely available.
For example, the VIX has not been a great predictive indicator for future stock price direction unless it is stressed considerably. Indeed, a study we conducted looking at the VIX climbing 25% from lows generates only random stock price outcomes (see Figure 1). When reviewing +25% moves off of the low point in the VIX within any month and seeing what happens to equities over the next three, six and 12 months only confirms that it is a rather inadequate predictor of future trend even as so many pundits use it to get a “fix” on investment community leanings. Moreover, easily available data provides little if any unique insight for fund managers seeking an “edge.”
Photo: Citi Investment Research & Analysis