Is VIX a Contrarian Indicator? On the Positivity of the Conditional Sharpe Ratio

The notion of compensation for systematic risk is well-ingrained in the finance literature. Whether explicitly considering the security market line's Capital Asset Pricing Model (CAPM), this notion is the basis for numerous empirical tests. The concept that an increase in the level of systematic risk might be accompanied by an increase in the required risk premium has strong intuitive content: The more risk there is to be borne, the greater the compensation therefor.The thrust of this paper is to augment previous tests of expected and realized returns by providing simple yet straightforward empirical tests of the proposition the market rewards the undertaking of equity risk. Specifically, we seek to answer the question, Using observed realized returns, is an increase in systematic risk accompanied by an increase in the equity risk premium? Our tentative answer is in the affirmative