ISSN: 2056-3736 (Online Version) | 2056-3728 (Print Version)

VIX Index and Stock Returns Following Large Price Moves

Andrey Kudryavtsev

Correspondence: Andrey Kudryavtsev,

Department of Economics and Management, The Max Stern Yezreel Valley College, Israel

pdf (730.59 Kb) | doi:


My study explores the effect of future volatility expectations, embedded in VIX index, on large daily stock price changes and on subsequent stock returns. Following both psychological and financial literature claiming that good (bad) mood may cause people to perceive positive (negative) future outcomes as more probable and that the changes in the value of VIX may be negatively correlated with contemporaneous investors’ mood, I hypothesize that if a major positive (negative) stock price move takes place on a day when the value of VIX falls (rises), then its magnitude may be amplified by positive (negative) investors' mood, creating price overreaction to the initial company-specific shock, which may result in subsequent price reversal. In line with my hypothesis, I document that both positive and negative large price moves accompanied by the opposite-sign contemporaneous changes in VIX are followed by significant reversals on the next two trading days and over five- and twenty-day intervals following the event, the magnitude of the reversals increasing over longer post-event windows, while large stock price changes taking place on the days when the value of VIX moves in the same direction are followed by non-significant price drifts. The results remain robust after accounting for additional company (size, beta, historical volatility) and event-specific (stock's return and trading volume on the event day) factors, and are stronger for small and volatile stocks.


  Behavioral Finance; Large Price Changes; Mood; Overreaction; Stock Price Reversals; Volatility Expectations; VIX.


Atkins, A.B., and E.A. Dyl, 1990, Price Reversals, Bid-Ask Spreads and Market Efficiency, Journal of Financial and Quantitative Analysis, 25(4), 535-547.

Avramov, D., T. Chordia, and A. Goyal, 2006, Liquidity and Autocorrelations in Individual Stock Returns, Journal of Finance, 61(5), 2365-2394.

Baker, M., and J. Wurgler, 2006, Investor Sentiment and the Cross-Section of Stock Returns, Journal of Finance, 61(4), 1645-1680.

Bremer, M., T. Hiraki, and R.J. Sweeney, 1997, Predictable Patterns after Large Stock Price Changes on the Tokyo Stock Exchange, Journal of Financial and Quantitative Analysis, 32(3), 345-365.

Bremer, M., and R.J. Sweeney, 1991, The Reversal of Large Stock-Price Decreases, Journal of Finance, 46(2), 747-754.

Brown, K.C., W.V. Harlow, and S.M. Tinic, 1988, Risk Aversion, Uncertain Information, and Market Efficiency, Journal of Financial Economics, 22(2), 355-385.

Cao, M., and J. Wei, 2005, Stock Market Returns: A Note on Temperature Anomaly, Journal of Banking and Finance, 29(6), 1559-1573.

Chan, W.S., 2003, Stock Price Reaction to News and No-News: Drift and Reversal after Headlines, Journal of Financial Economics, 70(2), 223-260.

Conrad, J.S., A. Hameed, and C. Niden, 1994, Volume and Autocovariances in Short-Horizon Individual Security Returns, Journal of Finance, 49(4), 1305-1329.

Constans, J.I., and A.M. Mathews, 1993, Mood and Subjective Risk of Future Events, Cognition and Emotion, 7(6), 545-560.

Cooper, M., 1999, Filter Rules Based on Price and Volume in Individual Security Overreaction, Review of Financial Studies, 12(4), 901–935.

Cox, D.R., and C.R. Peterson, 1994, Stock Returns following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance, Journal of Finance, 49(1), 255-267.

Daniel, K., D. Hirshleifer, and A. Subrahmanyam, 1998, Investor Psychology and Security Market Under- and Overreactions, Journal of Finance, 53(6), 1839-1885.

DeBondt, W.F.M., and R. Thaler, 1985, Does the Stock Market Overreact? Journal of Finance, 40(3), 793–805.

DeBondt, W.F.M., and R. Thaler, 1987, Further Evidence on Investor Overreaction and Stock Market Seasonality, Journal of Finance, 42(3), 557-580.

Dichev, I.D., and T.D. Janes, 2003, Lunar Cycle Effects in Stock Returns, Journal of Private Equity, 6(4), 8-29.

Fehle, F., and V. Zdorovtsov, 2003, Large Price Declines, News, Liquidity and Trading Strategies: An Intraday Analysis, Working Paper, University of South Carolina.

Forgas, J.P., 1992, Affect in Social Judgment and Decisions: A Multi-Process Model, Advances in Experimental Psychology, 25, 227-275.

Hamelink, F., 1999, Systematic Patterns Before and After Large Price Changes: Evidence from High Frequency Data from the Paris Bourse, Working Paper, Groupe HEC Paris.

Hilgard’s Introduction to Psychology, Thirteenth Edition, 2000, Rita L. Atkinson, Richard C. Atkinson, Edward E. Smith, Daryl J. Bern and Susan Nolen-Hoeksema, Harcourt College Publishers.

Hirshleifer, D., and T. Shumway, 2003, Good Day Sunshine: Stock Returns and the Weather, Journal of Finance, 58(3), 1009-1032.

Hong, H., and J.C. Stein, 1999, A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets, Journal of Finance, 54(6), 2143-2184.

Howe, J.S., 1986, Evidence on Stock Market Overreaction, Financial Analysts Journal, 42(3), 74-77.

Ikenberry, D.L., and S. Ramnath, 2002, Underreaction to Self-Selected News Events: The case of Stock Splits, Review of Financial Studies, 15(2), 489–526.

Isen, A.M., 2000, Positive Affect and Decision Making, In M. Lewis & J. M. Havieland (Eds.), Handbook of Emotions, 2, 417-435, London: Guilford.

Isen, A.M., T.E. Shalker, M. Clark, and L. Karp, 1978, Affect, Accessibility of Material in Memory, and Behavior: A cognitive Loop? Journal of Personality and Social Psychology, 36(1), 1-12.

Jegadeesh, N., and S. Titman, 1993, Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency, Journal of Finance, 48(1), 65-91.

Johnson, E.J., and A. Tversky, 1983, Affect, Generalization, and the Perception of Risk, Journal of Personality and Social Psychology, 45(1), 20-31.

Kahneman, D., and J. Riis, 2006, Living and Thinking About it: Two Perspectives on Life, The Science of Well-Being, F. Huppert, B. Keverne, & N. Baylis (Eds.), Oxford University Press.

Kamstra, M.J., L.A. Kramer, and M.D. Levi, 2000, Losing Sleep at the Market: The Daylight-Savings Anomaly, American Economic Review, 90(4), 1005–1011.

Kamstra, M.J., L.A. Kramer, and M.D. Levi, 2003, Winter Blues: A Sad Stock Market Cycle, American Economic Review, 93(1), 324–343.

Kliger, D., G. Gurevich, and A. Haim, 2012, When Chronobiology Met Economics – Seasonal Affective Disorder and the Demand for Initial Public Offerings, Journal of Neuroscience, Psychology and Economics, 5(3), 131-151.

Kliger, D, and A. Kudryavtsev, 2013, Volatility Expectations and the Reaction to Analyst Recommendations, Journal of Economic Psychology, 37(1), 1-6.

Kliger, D., and O. Levy, 2003a, Mood-induced Variation in Risk Preferences, Journal of Economic Behavior and Organization, 52(4), 573-584.

Kliger, D., and O. Levy, 2003b, Mood and Judgment of Subjective Probabilities: Evidence from the U.S. Index Option Market, European Finance Review, 7(2), 235-248.

Kliger, D., and O. Levy, 2008, Mood Impacts on Probability Weighting Functions: “Large-Gamble” Evidence, Journal of Socio-Economics, 37(4), 1397-1411.

Krivelyova, A., and C. Robotti, 2003, Playing the Field: Geomagnetic Storms and International Stock Returns, Federal Reserve Bank of Atlanta, Working Paper 2003-5b.

Larson, S.J., and J. Madura, 2003, What Drives Stock Price Behavior Following Extreme One-Day Returns, Journal of Financial Research, 26,(1), 113-27.

Lasfer, M.A., A. Melnik, and D. Thomas, 2003, Stock Price Reaction in Stressful Circumstances: An International Comparison, Journal of Banking and Finance, 27(10), 1959-1977.

Lehmann, B.N., 1990, Fads, Martingales and Market Efficiency, Quarterly Journal of Economics, 105(1), 1-28.

Lo, A.W., and A.C. MacKinlay, 1990, An Econometric Analysis of Nonsynchronous Trading, Journal of Econometrics, 45(2), 181-212.

Loewenstein, G.F., C.K. Hsee, E.U. Weber, and N. Welch, 2001, Risk as Feelings, Psychological Bulletin, 127(2), 267-286.

Mazouz, K., L.J. Nathan, and J. Joulmer, 2009, Stock Price Reaction Following Large One-Day Price Changes: UK Evidence, Journal of Banking and Finance, 33(8), 1481-1493.

Mehra, R., and R. Sah, 2002, Mood Fluctuations, Projection Bias, and Volatility of Equity Prices, Journal of Economic Dynamics and Control, 26(5), 869-887.

Michaely, R., and K.L. Womack, 1999, Conflict of Interest and the Credibility of Underwriter Analyst Recommendations, Review of Financial Studies, 12(4), 653-686.

Park, J., 1995, A Market Microstructure Explaining for Predictable Variations in Stock Returns following Large Price Changes, Journal of Financial and Quantitative Analysis, 30(2), 241-256.

Pritamani, M., and V. Singal, 2001, Return Predictability Following Large Price Changes and Information Releases, Journal of Banking and Finance, 25(4), 631-656.

Ratner, M., and R. Leal, 1998, Evidence of Short-Term Price Reversals Following Large One Day Movements in the Emerging Markets of Latin America and Asia, Working paper, Rider University, New Jersey, US.

Renshaw, E.F., 1984, Stock Market Panics: A Test of the Efficient Market Hypothesis, Financial Analysts Journal, 40(3), 48-51.

Saunders, E.M., 1993, Stock Prices and Wall Street Weather, American Economic Review, 83(5), 1137-1145.

Savor, P., 2012, Stock Returns after Major Price Shocks: The Impact of Information, Journal of Financial Economics, 106(3), 635-659.

Schwarz, N., 1990, Feelings as Information. Informational and Motivational Functions of Affective States, in R. Sorrentino and ET Higgins, eds.: Handbook of Motivation and Cognition (Guilford Press, New York).

Schwarz, N., 2002, Feelings as Information: Moods Influence Judgments and Processing Strategies, In T. Gilovich, D. Griffin & D. Kahneman (Eds.). Heuristics and Biases: The Psychology of Intuitive Judgment, 534-547, New York: Cambridge University Press.

Schwarz, N., and G.L. Clore, 1983, Mood, Missatribution, and Judgments of Well-Being: Informative and Directive Functions of Affective States, Journal of Personality and Social Psychology, 45(3), 513-523.

Sturm, R.R., 2003, Investor Confidence and Returns Following Large One-Day Price Changes, The Journal of Behavioral Finance, 4(4), 201-216.

Tetlock, P. C., 2010, Does Public Financial News Resolve Asymmetric Information? Review of Financial Studies, 23(9), 3520-3557.

Vega, C., 2006, Stock Price Reaction to Public and Private Information, Journal of Financial Economics, 82(1), 103-133.

Whaley, R.E., 1993, Derivatives on Market Volatility: Hedging Tools Long Overdue, Journal of Derivatives, 1(1), 71-84.

Whaley, R.E., 2000, The Investor Fear Gauge, Journal of Portfolio Management, 26(3), 12-17.

Whaley, R.E., 2008, Understanding VIX, Working Paper, Vanderbilt University.

Wright, W.F., and G.H. Bower, 1992, Mood Effects on Subjective Probability Assessment, Organizational Behavior and Human Decision Processes, 52(2), 276-291.

Yuan, K., L. Zheng, and Q. Zhu, 2006, Are Investors Moonstruck? Lunar Phases and Stock Returns, Journal of Empirical Finance, 13(1), 1-23.

Zarowin, P., 1989, Short-Run Market Overreaction: Size and Seasonality Effects, Journal of Portfolio Management, 15(3), 26-29.