January 30, 2004

Correlating the VIX and Returns

What does it mean to say the VIX and market returns are correlated? Take a look at the chart below. It's a bit clumsy. But you can see is that, generally, a rise in the volatility means a fall in the Nasdaq ( the index I've compared the VIX to here). When investors have a heightened sense of risk, stocks sell off. Conversely, when investors are lazy and complacent (as they were earlier this week), stocks drift higher. What's notable about this picture is that even historically low levels of complacency about risk haven't been enough to drive the Nasdaq anywhere close to it's pre-crash high. It has, however, been enough for the Dow to recover to where it was nearly four years ago. On Jan. 28 of '00 the Dow traded at 10,940...yesterday it closed at 10,510.


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