Caveat: The VIX tends to lead EPU, not follow – Goldman Sachs

Goldman Sacs Options Research note details how the VIX index tends to lead the Economic Policy Uncertainty (EPU), not follow.

Key points

While many investors are worried that elevated levels of policy uncertainty could push the VIX higher, Granger causality tests show that the VIX tends to lead economic policy uncertainty, not follow. That could have big implications.

Although investors may “feel” that the VIX is currently too low relative to the level of policy uncertainty, statistics suggest that low monthly VIX levels have typically been followed by lower future levels of policy uncertainty.

While the market may react to future policy surprises, VIX spikes have often occurred after unpredictable geopolitical events or adverse economic or financial shocks. While we are sympathetic to the idea that VIX levels seem low, VIX spikes are simply hard to predict.