20 Years of VIX: Fear, Greed and Implications for Traditional Asset Classes

Abstract

In this article, I investigate the statistical properties and relationships of VIX with equities, commodities, real estate and bonds. I find that different VIX states result in very different risk adjusted performance for all asset classes, not just equities, and that significant deviations from normality are observed for each state as well as the full sample. Additionally, I demonstrate that correlations among asset classes are unstable and non-linear, leading to highly concentrated diversification benefits at the times of market stress, which a broad set of exposures is likely to negate. Based on empirical data, practical recommendations for investment analysis and risk management are included throughout the article. A companion article on alternative investment strategies called “20 Years of VIX: Fear, Greed and Implications for Alternative Investment Strategies” is available at http://ssrn.com/abstract=1597904.

Keywords: VIX, Volatility, Portfolio Management, Risk Management, Asset Allocation, Investment Management, Investment Strategy

JEL Classification: G10, G11