{"id":2092133,"date":"2018-11-13T11:10:49","date_gmt":"2018-11-13T05:40:49","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=2092133"},"modified":"2018-11-13T11:10:49","modified_gmt":"2018-11-13T05:40:49","slug":"vix-and-equity-index-returns-part-ii","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2018\/11\/13\/vix-and-equity-index-returns-part-ii\/","title":{"rendered":"VIX and Equity Index Returns, Part II"},"content":{"rendered":"

Please read Part I<\/a> for the introduction.<\/em><\/small><\/p>\n

Holding-period back-test<\/h3>\n

In Part I, we ran a quick back-test that would go long the equity index if the VIX was in a certain quintile and saw how the 5th quintile produced the lowest draw-down returns. The index was held only for a day. However, our box-plot of VIX quintile vs. subsequent n-day returns begs us to look at alternate holding periods as well. What would the returns be if we held onto the index beyond a day?<\/p>\n

Here is how long-only S&P 500 returns when VIX is in the 5th quintile, across different holding periods looks like:
\n\"S&P<\/a><\/p>\n

The problem with this strategy is that when there is a steep fall in the index, the VIX keeps going higher and will be in the 5th quintile for an extended period of time. Have a look at the 2008-2009 segment in this chart:
\n\"VIX<\/a><\/p>\n

What happens if we used the change in VIX to time the equity index?<\/p>\n

VIX returns deciles<\/h3>\n

If we bucket VIX returns (percentage change over previous close over n-days, 1000 trailing observations) into deciles and observe the next 5, 10, 15 and 20-day returns of the underlying index over them:
\n\"S&P<\/a><\/p>\n

There is no determinable pattern here. Perhaps the VIX and the index are co-incident with none holding the power of prediction over the other.<\/p>\n

Interested readers can browse the github repo<\/a> for corresponding Nikkei 225 and NIFTY 50 charts.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Please read Part I for the introduction. Holding-period back-test In Part I, we ran a quick back-test that would go long the equity index if the VIX was in a certain quintile and saw how the 5th quintile produced the lowest draw-down returns. The index was held only for a day. However, our box-plot of … <\/p>\n","protected":false},"author":2,"featured_media":2091813,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[3541,3221,1150],"class_list":["post-2092133","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-backtest","tag-vix","tag-volatility","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2092133","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=2092133"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2092133\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2091813"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=2092133"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=2092133"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=2092133"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}