Do Not Fear the Fear Index : Evidence from the US, UK and European Markets

The VIX index is commonly known as the “fear index”. Similar indices are introduced in the UK and in the European stock markets. In this study, we investigate whether such indices reflect investors’ fear. Our results from long-horizon predictive regressions show that the movements of these indices, as well as extreme jumps, fail to predict statistically significant negative market returns in the US, the UK and in the European markets. Moreover, the response of leading business cycle indicators to shocks in the fear indices are statistically insignificant. However, monetary policy in these countries appears to be sensitive to these shocks