Implied Volatility and Future Portfolio Returns PRITHVIRAJ BANERJEE Florida State University - Department of Finance JAMES S. DORAN Florida State University - Department of Finance DAVID R. PETERSON Florida State University - Department of Finance April 12, 2006 Abstract: Prior studies find that the CBOE Volatility Index (VIX) predicts returns on broad stock market indices. This is an important finding because it suggests implied volatilities measured by VIX are a risk factor affecting security returns or an indicator of market inefficiency. We extend prior work in three important ways. First, we examine portfolios sorted on book-to-market equity, size, and beta to see if VIXâs predictive ability is pervasive across different portfolios. Second, we include deviations of VIX from recent means in addition to VIX levels. Third, we control for the four Fama and French (1993) and Carhart (1997) factors MKT, SMB, HML, and UMD. We find that VIX-related variables have strong predictive ability, suggesting an important role for VIX in security returns.
Today would be best described as the takedown turnaround. Gap low, cover and/or reverse at the big support number. Vix showed it quite clearly.....
Market is indecisive as to whether this short term to intermediate term sell-off has more legs. Doubt much more movement today as we rotate around yesterday's close. Famous last words....
Not likely. Volatility and trendiness are both below historical averages...making the ES/SP less tradeable. T = Trendiness V = Volatility Numbers across top = number of days examined.
Acrary, Thank you for the analysis. Seems as you say the numbers suggest reversion to the mean still reigns supreme. Last two stacked directional days the exception over the last 3 years not the rule I suppose.
Just looks like all the moves are coming in bursts followed by large lull times. Even the Russell 2k is less tradeable (but better than the SP).
Of all the index markets to trade, the Nikkei is the most tradeable. The short term trendiness is the highest its been since 1998 and the volatility is lower.