Equity Returns Following Extreme VIX and WVF Movements, Part 2

Part 1 covered the relation between VIX/WVF extreme movements and SPY; here we take a wider look, covering a large number of international equity ETFs.

The main idea behind WVF is that it acts similarly to VIX in high-volatility situations, possibly enough to serve as an implied volatility substitute in cases where such an index does not exist. It can be useful to “confirm” signals based on implied volatility, or to replace them completely in cases where no implied volatility index exists. First of all let’s take a look at an updated VIX & SPY WVF chart:

VIX & SPY WVF

VIX & SPY WVF

The first post was a while ago, so let’s check how VIX and WVF have performed for SPY since then. The number of signals is very small, and WVF alone has underperformed compared to its historical results, but once again we see that the combination of VIX and WVF offered by far the best results:

Signal results since 25 Oct. 2012

Signal results on SPY since 25 Oct. 2012

 

Let’s take a look at how these signals work internationally:

vix

Close-to-close returns following 100-day 99th percentile VIX return.

 

It’s clear that using only VIX is pretty useless. Overall the returns are not significantly different from zero, and are even negative in many cases. Let’s check out WVF, which appears to work far better across most ETFs:

wvf

Close-to-close returns following 100-day 99th percentile WVF change.

 

Finally, when VIX and WVF extreme movements coincide, the results look fantastic:

both

Simultaneous VIX and WVF extreme movements.

Note that even in cases where WVF alone did not show good results (the VT and WVF ETFs for example), combining VIX and WVF still results in great improvement. There is an important, general lesson here about using non-price data as trade set-ups. With few exceptions, implied volatility, breadth, seasonality, etc. need to be “confirmed” by price to actually be useful.