24 Pages Posted: 27 Jun 2007
Date Written: April 2007
The article shows statistically that the VIX Implied Volatility Index is an important driver of the S&P 500 future returns. The statistical analysis is performed by means of a regression based on dummy variables in order to circumvent the difficulties posed by the lack of linearity between the variables. The results obtained are then used to construct an automated procedure that signals daily whether it is convenient to invest in the S&P 500 or to stay put. Finally, we test the quality of the signal by implementing an asymmetrical buy-and-hold strategy with 3-months horizon on the S&P 500. Our results show that the strategy outperforms the long-only strategy on the same index, thus confirming a widespread belief among traders.
Keywords: Implied volatility, Asset pricing forecast, Asymmetric strategies, Market's efficiency
JEL Classification: G12, G14, G15, C50, C52, C53
Suggested Citation: Suggested Citation
Cipollini, Alessandro Paolo Luigi and Manzini, Antonio, Can the VIX Signal Market's Direction? An Asymmetric Dynamic Strategy (April 2007). Available at SSRN: https://ssrn.com/abstract=996384 or http://dx.doi.org/10.2139/ssrn.996384