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Quant Investing: Style Rotation Based on the VIX Index (中文)

Cup of coffee and a newspaper

近年投資風氣興起,價值與成長投資皆有不少擁護者。本文應用趨勢分析及 Entropy 模型對市場波動度逕行分析,並判斷出成長股及價值股在市場下跌之際依舊能維持超額報酬。核心思想為當市場預期未來 VIX 指數上升、投資者看空,因此價值股相對成長股會有超額報酬。而當市場預期未來 VIX 指數趨緩並下降時,投資者看好,成長股較價值股會有超額報酬。

Style rotation is a timing strategy based on the state of VIX, deciding whether value stock or Growth stock can perform well based on different timing. This strategy was proposed by Maggie M. Copeland and Tomas E. Copeland (1999) at the beginning and improved the method by others in these decades. The main concept is that rising VIX will lead to falling confidence in growth stocks and decreasing will give the investor more confidence in growth stocks than value stocks.

In this article, we present two different views on constructing dollar-neutral strategies. And our universe is ETF rather than individual stocks.

  • The first one is the initial version (VIXpct, hereafter) which uses the view of Maggie M. Copeland and Tomas E. Copeland (1999), it shows that the percentage change of the VIX index could give can help us to identify when we should invest in growth or value stock.
  • The second view (SaEn, hereafter) uses the Entropy model to analyze the VIX index which was proposed by Levan Efremidze, James A. Dilellio, and Darrol J. Stanley (2014).
  • If you need more detail on how we construct the strategies, please contact us to get the full version of the quantitative report for August.
Figure 1: Performance of two style rotation

Figure 1 is the strategies’ performance from Jan.2016 to Aug.2022. It turns out that we can have some positive returns when the market is drastically changing. VIXpct strategy has a higher Sharpe ratio than our benchmark SPY and also has 10% alpha. For SaEn strategy, although it only has Shrape ratio of 0.52. it’s because of the lower time in the market. If we observe SaEn strategy in Figure 1, we can see that it has a positive return in almost every drawdown of the market.

Figure 2: Performance and Leverage of Aggregation

Since both strategies have different advantages, we can combine them together and see what will be going on. We call the mixed strategy Aggression strategy, it uses VIXpct as a base of strategy cause it has a longer time in the market and higher return than Saen and also sees SaEn as a bonus signal. Hence, if both VIXpct and SaEn trigger, we will put two times leverage on the strategy.

Figure 3 : Statistics of strategies

Figure 2 shows the performance of two mixed strategies and the leverage of the Aggression strategy. we can see that both have a great performance in 2018, 2020, and 2022 big drawdown. Figure 3 is the statistics of the two strategies. Different from above, they have higher returns than the benchmark with a higher Sharpe ratio and lower max drawdown. Also, they have about 12% to 15% alpha to give profit in the bull market, and negative beta to give the profit when the market falls down.

Although style rotation is an old topic since 2000, it is still useful in recent years. By combining the classic style rotation together, we can get a more robust strategy and performance well recently. It is surprising that a dollar-neutral strategy with weekly or monthly rebalance has a quite high return as the market. In tern of trading, thanks to the popularity of the ETFs, we can easy to trade the growth or value stock ETFs we want rather than trading hundred of stocks at the same time.

Contact us at for the full report.

Yu-Chin Lin

Quantitative Research Intern, Quantitative Finance, Gamma Paradigm