Though the name contains “Volatility”, VIX is more about uncertainty/nervousness. People rarely panic when their stocks are going up.
RubiksPoint on
For large spikes, the negative correlation is because the market tends to “ride up on an escalator and down on an elevator”. The market moves up slowly, and sometimes it moves down really fast.
These events are usually very obvious in the market and the VIX. Some examples are 2008, the 2010 “flash crash”, and 2020. Massive drops are usually followed by more large drops or large increases (high volatility).
For smaller moves, like the everyday small ~%1 move of the market, I haven’t seen a good explanation for why the VIX is negatively correlated with the S&P 500. All the other explanations I’ve seen use vague mentions of “deleveraging” and “uncertainty”.
My best guess at the moment is that tomorrow’s move correlates better with the arithmetic mean of the previous few day’s moves rather than the geometric mean, but there’s no way for me to verify that this is actually the reason. I’d be interested to see if anyone has any other opinions or papers on the topic.
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Though the name contains “Volatility”, VIX is more about uncertainty/nervousness. People rarely panic when their stocks are going up.
For large spikes, the negative correlation is because the market tends to “ride up on an escalator and down on an elevator”. The market moves up slowly, and sometimes it moves down really fast.
These events are usually very obvious in the market and the VIX. Some examples are 2008, the 2010 “flash crash”, and 2020. Massive drops are usually followed by more large drops or large increases (high volatility).
For smaller moves, like the everyday small ~%1 move of the market, I haven’t seen a good explanation for why the VIX is negatively correlated with the S&P 500. All the other explanations I’ve seen use vague mentions of “deleveraging” and “uncertainty”.
My best guess at the moment is that tomorrow’s move correlates better with the arithmetic mean of the previous few day’s moves rather than the geometric mean, but there’s no way for me to verify that this is actually the reason. I’d be interested to see if anyone has any other opinions or papers on the topic.