Given The Level Of Economic Policy Uncertainty, The VIX Should Probably Be Higher

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Global economic policy uncertainty is near 20-year highs while the VIX is nearing 20-year lows. This is an odd configuration for these two series. Usually as economic policy uncertainty moves higher, the VIX moves higher with it. That is not the case today. In the scatter plot below which plots monthly data points for the two series going back 20 years, you can clearly see how the latest data is an outlier. The other three data points surrounding the latest data point are from June 2016, July 2016, and November 2016. Based on the level of the economic policy uncertainty in the world, a regression model would have predicted that the VIX would be pushing 30 instead of hovering around 10. All in all, it would seems more likely to us that the VIX will climb higher to close this gap rather than a swift drop in economic uncertainty.

Economic Policy Uncertainty VIXEconomic Policy Uncertainty VIX

Article by Eric Bush, CFA – Gavekal Capital Blog

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