Known as Wall Street’s “fear gauge,” VIX is followed by a multitude of market participants; its levels and trends have become part of the common language of market commentary. Unfortunately, the meaning of a given VIX level is frequently misunderstood. Our recent paper, “Reading VIX: Does VIX Predict Future Volatility?” provides market participants with simple rules that translate VIX levels into potentially more meaningful predictions or measures of market sentiment.
This document serves as an introduction to, and summary of, “Reading VIX: Does VIX Predict Future Volatility?” bypassing some of the academic rigor of the original in order to be more accessible to the practitioner. Exhibit 1 provides a key highlight: the extent to which our analysis could have provided market participants with a useful estimation of future changes in S&P 500® realized volatility, one month in advance.