Practical Applications of VIX versus Size

Abstract

What explains the cross-section of returns in the US equity market?

Maggie Copeland and Thomas Copeland, Co-Founders of Copeland Valuation Consultants, say that changes in VIX can explain stock returns. Their research shows that forward implied volatility, as measured by the VIX Index, is a key determinant,statistically more important than market cap.

The VIX—the “fear gauge”—is a commonly used measure of market risk, a contrarian indicator that spikes when the stock market declines. Using a data sample from the period 2000–2011, the authors find that when the VIX has a positive move, large-cap stocks outperform small-cap stocks, and viceversa. Their finding debunks the commonly held assumption that the size effect always holds true.