In previous posts we’ve broken down VIX spikes like the one we find ourselves in the middle of now. We’ve generally used Adam Warner’s criterion for calling a spike as being when the VIX closes at least 20% above its 10-day average (although note that the conclusions that follow hold for other values as well).
We’ve shown that mean-reversion tends to take over quickly following spikes of these magnitude, driving down the VIX and ETPs like VXX, and driving up inverse ETPs like XIV (see the numbers). In this post I want to look at how often that hasn’t been the case, or put another way, how often the VIX has continued to climb following one of these spikes, and where the VIX has eventually topped out.
First, to help visualize what we’re talking about, the graph below shows the VIX index since 03/2004 (when VIX futures began trading), with spikes at least 20% above the 10-day average marked in orange (1).
Note how the majority of the time, the orange circle marks either the top of the spike, or somewhere very close. Notable exceptions include late-2008 during the GFC, 2010/11 during the Euro debt crises, and our current spike at the far right of the graph.
Going back to 1986, there have been 75 such spikes on the VIX (2), or about 2.6 per year. In 73% of instances, that orange circle would be within 10% of where the spike eventually topped out. In 84% of instances it would be within 20%.
In other words, the impact of mean-reversion grows strong when the VIX gets so far so fast above its recent average. Very rarely does the VIX spike continue much further, except that when it does, it occasionally goes much further.
The next graph illustrates. Here we see all 75 spikes in the VIX’s entire history since 1986 (2), along with how far the spike eventually travelled “past the orange circle” before eventually topping out.
Again, the “orange circle” represents the initial VIX spike at least 20% above the 10-day average. Values of zero would mean that the orange circle represented the absolute top of the spike.
Our current spike, marked in orange on the graph, is now 24% above the orange circle. That puts it, by this particular measure, in 9th place in the VIX’s history.
Again, this isn’t a measure of highest VIX closes. The VIX has gone through long periods of time higher than current levels. Rather, this is a measure of when the VIX has spiked very quickly and suddenly from recent levels, and then bucked mean-reversion and continued even higher.
If the VIX continues much further from here, it enters rarefied air only seen during the largest previous crises in ’98 (LTCM), ’01 (9/11), ’10 and ’11 (Euro debt crises), ’08 (GFC), and of course, ’87 (Black Monday) (3).
Volatility Made Simple
- To control for overlapping VIX spikes, I required that after the VIX rose at least 20% above its 10-day average, it had to then fall back below its 10-day average before it could then register a new spike.
- For dates prior to 1990, I used the VXO index in place of the VIX. It’s an imperfect comparison, but close enough I think for the purposes of this illustration (and it’s useful to be able to capture the 1987 crash).
- The last chart in this post was truncated at 150%. Black Monday (the far right bar) actually topped out at 313% above the “orange circle”.