Do Large Shocks in VIX Signal Liability Management Strategies?

Abstract

The recent financial crisis provides an opportunity to examine flight-to-safety in response to various levels of market uncertainty. This study is the first to examine the degree of market uncertainty as measured by the CBOE volatility index (VIX). Findings suggest that large increases in the VIX index result in positive abnormal returns for equities in the gold and silver ore industries and SPDR Gold Shares (GLD) exchange traded funds (ETF). The performance of common stocks in the gold and silver ore industries and the GLD ETFs are examined relative to the level of uncertainty in the market. The level of uncertainty in the market is proxied by 10%, 25%, and 50% increases in the VIX index relative to its 75 day moving average. Evidence of flight-to-safety during a financial crisis exists in response to 25% increases in the VIX.