Election Years and Volatility Spikes

Historically speaking, there's little evidence that election years result in higher volatility

by Adam Warner

Published on Dec 24, 2015 at 9:10 AM

I keep mentioning everyone on TV expects a volatility pop in 2016. That's not unusual because they always expect volatility to go up, looking forward. CBOE Volatility Index (VIX) futures almost always price in higher vol out in time, so it's hard to really argue. But truthfully, when VIX does have one of its sporadic pops, VIX futures tend to go into backwardation, whereas pundits never do -- they'll still call for higher vol.

I agree with both, in a sense, but really for an actual reason other than "VIX looks too low for all the risks ahead." Rather, I do feel that we're slowly moving from a long-term low-volatility regime to a high-vol regime. But that's a topic for another day.

There is one reason I'm hearing for the 2016 volatility spike -- that is, it's an election year. That begs a question, of course: Does VIX actually do well in election years?

If it does, I'm hard-pressed to find evidence for it. Here's a look at VIX each election year back to 1992:

151224agw1

And here's another view:

151224agw2


Well, there's six election years. Three of them saw strong VIX, three saw weak VIX. There's perhaps a modest trend to volatility going higher in October. Maybe that's evidence of some options bid-up ahead of the election -- but keep in mind that's a seasonally strong time of year for volatility in all years.

We were clearly very nervous in 2008 -- thanks, Obama! But I'm pretty sure it had more to do with the Lehman implosion.

The election will have some impact on volatility, but I doubt it's a major driver, mainly because it rarely produces a surprise. We'll know for most of the fall who's likely to win, and investors will adjust accordingly.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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