Market Measures

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Intraday Reversal & Implied Volatility

Market Measures

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In this Market Measures segment, Tom and Tony ask the question: are indices more likely to reverse when implied volatility is high?

To determine the answer, our team looked for intraday reversals in SPY from 1993 to 2016. Intraday reversals were defined as either:

  • the market opening higher and then reversing-- closing below the previous close
  • the market opening lower and then closing above the previous close.

Initial research showed that the percentage of occurrences of intraday reversals decreased since the last financial crisis in 2008.

With that in mind, the Research Team aimed to test if intraday reversals occurred more in low or high IV environments.

Ultimately, although there were slightly more occurrences of intraday reversals in high IV environments, the differences were not significant. In Low IV (defined by when the VIX was below 15), there were reversals 30% of the time. In high IV (defined by when the VIX was above 15), there were reversals 33% of the time.

In conclusion, there were slightly more intraday reversals in higher implied volatility environments than lower implied volatility environments. Additionally, since 2008, there have been a decreasing number of intraday reversals, potentially due to the slow upward movement of the market.

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