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Since VIX/VXN are a measure of the market's volatility forecast, it makes sense
that it would not necessarily forecast price direction. Except for the fact
that most market tops exhibit low volatility and most market bottoms exhibit
high volatility.
One thing to think about is not whether VIX/VXN predict price direction but if
they predict *risk* in some significant way. Take a simple system that buys
the market today if yesterday was up with respect to the previous day - a very
simple trend following system. This system probably does not make money. Then
modify the system to only by today if VIX was also down the previous day. Did
the win ratio go up? Was the max. drawdown less in any signficant way? Was
the pattern relatively stable month to month?
I haven't tried this - just noting that volatility might be used as another
factor in a trading model, and not necessarily simply to predict price.
It may also depend upon which timeframe one is making the forecast. One month?
One week? One day?
As an aside, several years ago - I compared VIX's ability to predict price
range over the course of the next 20 trading days (one month) versus 20-day
historical (statistical) volatility and VIX did a better job. This is important
if you're using VIX to establish spreads or other option positions for example.
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