Jun 29, 2011

Negative SPX/VIX Correlation, Predictor or Not?

Economist Eric Falkenstein, whose blog I follow religiously has a post about correlation between SPX and VIX. He writes that this correlation "...seems mainly a contemporaneous pattern applied to changes in volatility, spilled milk as opposed to a predictor. Think about when volatility was rising in 2008, and prices were falling simultaneously. The rise in volatility was not predicting price moves, just reflecting them, and the high volatility correlated with both the big move down and the big rebound in the latter part of 2009. " He addresses findings from another researcher, and there are interesting points raised in comments. In my own trading I do not use VIX, implied volatility, realized volatility or volatility forecast as indicator of market direction, because of their poor forecasting ability. See also my previous post on SPX/VIX correlation.

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