VIX versus Size

Abstract

VIX (CBOE Volatility Index) is often called the “fear index.” Using monthly returns from January 2000 to December 2011 as their data sample, the authors find that when the change in VIX is positive, large-capitalization stocks (the S&P 500) outperform small-capitalization stocks (the S&P 600); and when the change in VIX is negative, small-cap stocks outperform. Furthermore, the statistical significance of the change in VIX is substantially greater than SIZE (the natural logarithm of the market capitalization). The authors argue that the benefit of owning a small-cap stock depends on the distribution of the change in VIX in any given period. During the period July 2007–March 2009, both levels of the large-cap index (S&P 500) and the small-cap index (S&P 600) had a maximum drawdown over 50%, and the small-cap suffered much more than the large-cap. This huge drawdown demonstrates the importance of the effect of VIX on the cross section of stock returns