How A High VIX Makes A Sudden Drop More Likely

With the VIX picking up, you might be wondering if it’s time to reduce your exposure to risky assets a bit until the market calms down. According to new research from First Quadrant Analytics that might not be a bad idea because the chance of a sharp, two or three sigma, drop is a lot higher during high volatility regimes.

“While ‘tail risk’ has always existed in the markets, it is mostly since the financial crisis of 2008 and the resulting bear market that investors have become accepting of its persistence,” write First Quadrant partner Ed Peters and associate director Bruno Miranda. “This paper shows that the probability of a large drop in the market varies over the market...