Can the VIX Signal Market's Direction? An Asymmetric Dynamic Strategy

24 Pages Posted: 27 Jun 2007  

Alessandro Paolo Luigi Cipollini

Deutsche Bank, Fixed Income Research; Università Degli Studi del Sacro Cuore di Milano - Laboratory of Statistics; University of Milan-Bicocca - Department of Mathematics and Applications

Antonio Manzini

UBS Global Asset Management

Date Written: April 2007

Abstract

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

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

Alessandro Paolo Luigi Cipollini (Contact Author)

University of Milan-Bicocca - Department of Mathematics and Applications ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, MI 20126
Italy
+390264485728 (Phone)

HOME PAGE: http://www.matapp.unimib.it

Deutsche Bank, Fixed Income Research ( email )

Winchester House
Great Winchester Street, 1
London EC2N 2DB
United Kingdom

Università Degli Studi del Sacro Cuore di Milano - Laboratory of Statistics ( email )

Via Necchi 9
Milano, MI 20121
Italy

HOME PAGE: http://www.unicatt.it

Antonio Manzini

UBS Global Asset Management ( email )

Zurich, CH-8098
Switzerland

Paper statistics

Downloads
2,064
Rank
5,197
Abstract Views
6,619