Rescaled Range Analysis: Analyzing the VIX
Earlier this year I wrote a post explaining the forgotten quantitative technique of rescaled range analysis, which was invented by hydrologist Harold Edwin Hurst and can be used to assess the nature and magnitude of variability in financial data over time. In a follow-up post, “Is the S&P 500 Mean Reverting?” I calculated a “Hurst exponent” of 0.49 for the S&P 500 index for the period 3 January 1950 to 15 November 2012, a number which suggests that the benchmark index exhibits a “random walk”: knowing one data point in the time series does not provide insight into predicting future data points.
Financial economists Tim Husson and Tim Dulaney of consulting firm Securities Litigation and Consulting Group have done me the honor of extending the analysis. In a recent blog post, they performed a rescaled range analysis of the Chicago Board Options Exchange Market Volatility Index, better known as “the VIX,” a popular measure of implied volatility, or perceived riskiness, in financial markets.
Their finding? That the VIX has a Hurst exponent of roughly 0.36 for the period 29 January 1993 to 1 March 2013 — a number which suggests that the so-called “fear index,” unlike the S&P 500, “is mean-reverting with a slight bias toward randomness.
Read “Persistence and Mean Reversion in Market Data” on the Securities Litigation & Consulting Group blog.
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