Wednesday, May 31, 2006

Blog of the Week: TraderFeed

When the VIX Itself Becomes Volatile

Yesterday, we had an enormous daily rise in the VIX of over 30%. To put this into perspective, we have only had one larger VIX spike in percentage terms since 1998, and that was the day we opened after 9/11. A chart in my most recent post on the Trading Psychology Weblog puts this into perspective.

What typically happens after a single day spike in VIX?

Since January, 1998 (N = 2108), we have had 27 occasions in which VIX has moved more than 15% in a day. All but one of these occasions were market declines. The next day, the market (SPY) was up by an average .37% (18 up, 9 down). That is much stronger than the average daily change for the entire sample (.02%; 1092 up, 1016 down).

Just as important, the five days following the VIX spike day showed much higher VIX (and price) volatility than average. The average daily VIX change over the next five days was 7.91%, and the average daily price change was 1.42%. Those compare with the averages for the sample of 4.13% and .89%, respectively.

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