Stocks for the Long Run : the Definitive Guide to Financial Market Returns and Long-term Investment Strategies

In the early and mid-1990s, the Volatility Index sank to between 10
and 20. But with the onset of the Asian crises in 1997, the VIX moved up
to a 20 to 30 range. Spikes between 50 and 60 in the VIX occurred on
three occasions: when the Dow fell 550 points during the attack on the
Hong Kong dollar in October 1987; in August 1998 when Long-Term
Capital Management (LTCM) was liquidated; and in the week following
the terrorist attacks of September 11, 2001.
In recent years, buying when the VIX is high and selling when it is
low has proved to be a profitable strategy for the short term. But so has
buying during market spills and selling during market peaks. The real
question is how high is high and how low is low. For instance, an in-
vestor might have been tempted to buy into the market on Friday, Octo-
ber 16, 1987, when the VIX reached 40. Yet such a purchase would have
proved disastrous given the record one-day collapse that followed on
Monday.

282 PART 4 Stock Fluctuations in the Short Run

FIGURE16–4

The CBOE Volatility Index (VIX), 1986 to 2006

0

10

20

30

40

50

60

70

80

90

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

170

October 19, 1987

Stock Crash

Collapse of

UAL Buyout

Iraq Invades

Kuwait

Beginning of

Gulf War

Asian Currency Crisis

LTCM Hedge Fund Bailout

and Russia Default Terrorist

Attacks

Iraq Invasion

Oct. ’ 02

Market Trough