Risk and uncertainty in style rotation

The Chicago Board Options Exchange (CBOE VIX; volatility) index has been established as a leading indicator of style returns since increases in this "fear index" lead to outperformance of "value" versus "growth" stocks. This study introduces the concept of "uncerta...

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Bibliographic Details
Published in:Financial services review (Greenwich, Conn.) Conn.), 2018-07, Vol.27 (2), p.189-207
Main Author: Krause, Timothy A
Format: Article
Language:English
Subjects:
Economic policy
Equity
Growth stocks
Investments
Macroeconomics
Probability
Probability distribution
Proxies
Rates of return
Risk exposure
Short sales
Stock exchanges
Stock options
Value stocks
Volatility
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Summary:The Chicago Board Options Exchange (CBOE VIX; volatility) index has been established as a leading indicator of style returns since increases in this "fear index" lead to outperformance of "value" versus "growth" stocks. This study introduces the concept of "uncertainty" as an additional indicator of returns to value, as measured by the CBOE VVIX ("volatility of volatility"). This index is considered to be a proxy for "uncertainty" in the Knightian sense. Increases in expected volatility lead to short-term positive returns to value, while increases in uncertainty lead to negative short-term returns to value. Each of these observations are especially strong during economic downturns and after decreases in the VIX index. Several macroeconomic indicators provide additional incremental information regarding these phenomena. © 2018 Academy of Financial Services. All rights reserved.
ISSN:1057-0810
1873-5673