VIX/VXV Ratio Says Loose Equities

The blog VIX and more has an interesting chart:

It shows the ratio of the VIX Index and the VXV Index.  The author of the blog explains:

My thesis is simply this: the VIX looks out 30 days into the future and captures “event volatility” – or the volatility that is associated with events that are expected to occur in the next 30 days. These include Fed meetings, important economic data releases (employment report, consumer prices, retail sales, durable goods orders, GDP, etc.), earnings from bellwether stocks, even hurricanes, geopolitical crises and other events which can expect to cast a shadow over the course of the next 30 days.

The other half of the thesis is that the VXV (essentially a 93 day version of the VIX) always incorporates a full earnings cycle and a full economic data release cycle – so these events have very little impact on the VXV. As a result, the volatility that is relevant to the VXV is structural or systemic.

So whenever the VIX/VXV ratio is high (low), event volatility is expensive (cheap) relative to structural volatility. The chart above shows that the VIX is currently cheap relative to the VXV. So expect an upturn in the VIX going forward (and lower equity prices along the way).