Volatility's Surprising Impact on Stocks

The New York Times recently ran this graph on the stock market's volatility. I heard Dylan Ratigan the other day describing how volatile the market is. Actually, the market's volatility isn't very high on an historical basis. It's just much higher than it's been.

Here's a look at how well the S&P 500 has done by VIX level, which is an index of implied volatility:

The magic point is 22.66. When the VIX is above that, the market does well. Below that, not so much. Before last July, the stock market had gone over years with only breaking that magic mark twice. Since then, we've been above it about half the time.

This comes as a bit of a surprise to me because I've generally felt that volatility doesn't have much impact by itself. Perhaps I have to reconsider, though my chart only includes data since 1990. I wouldn't mind seeing more.

Comments

[ikkyu:]

If you can turn that into a tradable strategy. you are my hero!

2008 Jan 08 08:24 AM