Risk and Uncertainty in Style Rotation

34 Pages Posted: 27 Jul 2018

Date Written: July 6, 2018

Abstract

The effectiveness of the VIX index as a leading indicator of style returns has been examined in the finance literature, finding that increases in this “fear index” lead to outperformance of “value” vs “growth” stocks, although the effect has attenuated over time. This study introduces the concept of “uncertainty” as an additional indicator of returns to value, as measured by the CBOE® VVIX (“volatility of volatility”), that that may be considered as a proxy for “uncertainty” in the Knightian sense. Increases in uncertainty (the VVIX index) lead to negative short-term returns to value. Additional macroeconomic variables provide additional incremental information regarding these phenomena.

Keywords: VIX Index; VVIX Index; Volatility; Exchange Traded Fund; ETF; Uncertainty; Value vs. Growth; Style Return

JEL Classification: G1; C1; C5

Suggested Citation

Krause, Timothy A., Risk and Uncertainty in Style Rotation (July 6, 2018). Available at SSRN: https://ssrn.com/abstract=3209491 or http://dx.doi.org/10.2139/ssrn.3209491

Timothy A. Krause (Contact Author)

Penn State Behrend ( email )

Black School of Business
5101 Station Road
Erie, PA 16563
United States
814-898-6236 (Phone)

HOME PAGE: http://https://psbehrend.psu.edu/school-of-business/faculty-staff-directory/finance/timothy-krause

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