We examine the impact of changes in VIX on subsequent stock returns during recent time period from January 2004 to December 2017. We found changes in VIX can accurately predict the direction of next month's stock return during period of economic recession and when the stock market generated negative monthly returns. However, changes in VIX could not effectively predict the direction of subsequent month's stock return during period of economic expansions and when stock market generated positive monthly returns. We found positive changes in VIX are associated with statistically significant negative stock returns in subsequent month of both S&P 500 as well as NASDAQ stock indices. These results support earlier findings that changes in VIX are a leading indicator of the stock market. However, we find changes in VIX are only effective as a market-timing signal when the stock market is not performing well and is generating negative return in the subsequent month. The changes in VIX are not effective as a signal when the stock market is performing well and generating positive return in the subsequent month.
VIX, market volatility index, fear index, behavioral finance, stock return, economic cycles, recession, expansion, stock market efficiency.