Can We Use VIX Beta to Beat a Volatile Market?

This article examines the relationship between daily VIX and abnormal stock return in the 2020 Covid crisis. We find that adding a VIX factor to benchmark models can significantly reduce the probability of abnormal stock return, and the VIX beta has an evident impact on such probabilities. In addition, stock portfolios with different VIX beta deciles demonstrate distinct patterns in abnormal portfolio returns. We propose a portfolio-switching strategy that can statistically outperform the market significantly while using a systematic model to explain the strategy’s logic. We also find that the effect of VIX on stock abnormal return varies across market states.