The VIX:VXV Ratio

The VXV is the VIX’s longer-term brother; it measures implied volatility 3 months out instead of 30 days out. The ratio between the VIX and the VXV captures the differential between short-term and medium-term implied volatility. Naturally, the ratio spends most of its time below 1, typically only spiking up during highly volatile times.

VIX VXV Ratio Chart

It is immediately obvious by visual inspection that, just like the VIX itself, the VIX:VXV ratio exhibits strong mean reverting tendencies on multiple timescales. It turns out that it can be quite useful in forecasting SPY, VIX, and VIX futures changes.

Short-term extremes

A simplistic method of evaluating short-term extremes is the distance of the VIX:VXV ratio from its 10-day simple moving average. When the ratio is at least 5% above the 10SMA, next-day SPY returns are, on average, 0.303% (front month VIX futures drop by -0.101%). Days when the ratio is more than 5% below the 10SMA are followed by -0.162% returns for SPY. The equity curve shows the returns on the long side:

short term EC

Long-term extremes

When the ratio hits a 200-day high, next-day SPY returns have been 0.736% on average. Implied volatility does not fall as one might expect, however.

More interestingly, the picture is reversed if we look at slightly longer time frames. 200-day VIX:VXV ratio extremes can predict pullbacks in SPY quite well. The average daily SPY return for the 10 days following a 200-day high is -0.330%. This is naturally accompanied by increases in the VIX of 1.478% per day (the front month futures show returns of 1.814% per day in the same period). It’s not a fail-proof indicator (it picked the bottom in March 2011), but I like it as a sign that things could get ugly in the near future. We recently saw a new 200-day high on the 19th of December: since then SPY is down approximately 1%.

200d high cumulative


This is my last post for the year, so I leave you with wishes for a happy new year! May your trading be fun and profitable in 2013.

Comments (3)

  • @ContangoMojo says:

    I plot the VIX:VXV ratio daily and I find it’s a great way to measure the waves of fear and greed in the market. When it pops over 1.1; that’s a great time to go to cash or play some shorts. When its back under 1 and especially under 0.9 that’s a great time to short volatility products and profit from Contango in the volatility futures structure.

    I especially like how it can warn early of the big pops in VIX and big drops in the market. Look at how the ratio grew for days or even months before the darkest days of September 2008, May 2010 and August 2011. It’s like the market was getting itself ready for those Black Swans.

  • Finanzas 101: VIX:VXV ratio | QFC Quantitative Finance Club says:

    […] sitio Quantitative Systemic Market Analysis tiene un breve e interesante post sobre el ratio […]

  • 2013: Lessons Learned and Revisiting Some Studies says:

    […] studies on the implied volatility indices ratio turned out to work pretty badly. Returns when the VIX:VXV […]

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