Over the course of the past few days I have been tracking the slow grind upward in the VIX on Twitter, noting that it had been up seven, eight and eventually nine (as of Friday) days in a row. As the VIX is a mean reverting animal, I find it interesting that until Friday, the VIX had never risen for nine consecutive days in 27 years of VIX data. Perhaps even more interesting, during the same period, the VIX had fallen nine days in a row on nine separate instances and even managed to fall ten days in a row on three occasions. For those who may be wondering, this is yet another data point supporting the idea that VIX mean reversion is more robust following a sharp VIX spike than a sharp VIX decline.
Whenever the VIX makes an unusual move, I am bombarded by variations along the lines of, “That’s nice, but what does it mean for the markets?" As much as the doomsayers hate to hear this, fear is almost always a great fade, particularly when you have a little patience. Rather than talking about the matter in theoretical terms, however, I thought I would let some numbers do the talking. In the table below, I have assembled the fifteen instances in which the VIX has been up at least seven days in a row and have calculated the mean and median performance in the VIX for seven different intervals ranging from one day to 100 days.
Not surprisingly, the mean and median performance of the VIX following these 15 streaks and 1-100 days is uniformly negative. The data set includes data from Thursday and Friday, which show increases in the VIX and render the one-day performance relatively weak when compared to the rest of the measurement periods. That being said, mean reversion is evident from the first day all the way through the five-month period that forms the most distant measurement date in this table.
Once again, these findings are consistent with dozens of similar tables presented in these pages over the years that show fading a VIX spike is, on average, an excellent trade opportunity, assuming elevated levels of volatility will persist.
Returning to theoretical territory, if you think about it, what is the type of environment that is likely to cause the VIX to move higher every day for a week and a half or so? Typically it is event risk in the form of a known event on the calendar that investors obsess about and become increasingly anxious about as it draws ever nearer. Think of Fed meetings (The VIX and the Pre-FOMC + Post-FOMC Trades), Greece’s elections or key Parliament votes, Congressional votes related to the fiscal cliff, etc. [See A Conceptual Framework for Volatility Events for more background and context.]
Contrast fretting about the scheduled event risk with something that comes out of nowhere, like the yuan devaluation, Ebola virus, Fukushima, various terrorist incidents and even the Arab Spring. These dark gray swans blindsided investors and caused a sudden sharp VIX spike – the kind whose steepness cannot be sustained over the course of 1 ½ weeks.
A Twitter reader asked about volatility crushes and their timing. In a nutshell, a volatility crush is the opposite of a volatility spike and generally happens after a scheduled event is over. In addition to the macro events listed above, one often sees a volatility crush following an earnings report. For reasons discussed in A Conceptual Framework for Volatility Events, a volatility crush is much less likely to occur in the context of an unscheduled event with no notice and an uncertain duration.
Today we saw an excellent example of a volatility crush following the announcement by James Comey that the recently discovered batch of emails contained no new evidence in the Hillary Clinton private email server case, reaffirming that there would be no criminal charges against Clinton. Front month (November) VIX futures are down 12% on this news.
Disclosure(s): the CBOE is an advertiser on VIX and More