Seasonal Patterns in the VIX: Fact or Fiction?

The idea of seasonality suggests that the VIX follows a predictable pattern at certain times of the year. Some studies suggest that the VIX rises in summer and early fall, with major seasonal lows in July and major highs in October.

This pattern is often attributed to various factors such as cyclical trends, investor sentiment, and major economic events.

But is this really the case?

Does the data support the claim of seasonality in the VIX?

If there is seasonality in the VIX, it should be evident in the historical data. Individual months or periods of the year would have to be significantly different from the rest of the year.

The following table shows the monthly closing levels of the VIX from 1990 to 2021:

Number	Month	*Mode	Median	Average
1	January	12	17.88	19.02
2	February	15	18.2	19.52
3	March	14	17.69	20.18
4	April	13	16.82	18.93
5	May	13	16.92	18.27
6	June	17	17.25	18.38
7	July	13	16.74	17.82
8	August	12	17.2	19.24
9	September	13	17.56	20.46
10	October	15	18.12	21.77
11	November	13	17.89	20.44
12	Dezember	12	17.99	19.44

*Value that occurs most frequently

The Case for Seasonality in the VIX

Seasonality in the financial markets is a phenomenon that has fascinated analysts and traders for decades. Many believe that various asset classes exhibit recurring patterns based on the time of year, and the Volatility Index (VIX) is no exception. While the existence of seasonality in the VIX remains a topic of debate, proponents argue several compelling points in favor of the theory:

Market behavior and sentiment: Seasonal changes in market behavior and investor sentiment can have a significant impact on the VIX. For example, the transition from summer to fall often coincides with increased market activity as traders return from vacation and refocus their portfolios.

This shift in sentiment can lead to increased market volatility, which may be reflected in the VIX.

Economic Cycles: Business cycles often follow seasonal patterns. For example, consumer spending typically increases during the holiday season, which can affect corporate earnings and subsequently stock market volatility. Understanding these economic cycles can help predict when the VIX may fluctuate.

Corporate earnings seasons: The timing of corporate earnings releases can influence market volatility. Earnings seasons, which occur quarterly, tend to create uncertainty and price swings. Analysts argue that the VIX may exhibit seasonal patterns based on when these earnings reports are released.

Holidays and Market Closures: Holidays and market closures can create gaps in trading activity. Extended weekends, such as the Labor Day weekend in the United States, can lead to changes in market dynamics when trading resumes. These gaps can result in a temporary spike in volatility that affects the VIX.

Historical Data Patterns: Proponents of VIX seasonality often point to historical data that appears to show recurring trends during certain months or periods. These patterns may include higher VIX levels during the summer months, coinciding with the phenomenon known as the “summer doldrums”.

Behavioral Finance Factors: Behavioral finance suggests that psychological biases can influence investor decisions. Seasonal factors, such as the psychological impact of the holiday season or year-end tax decisions, can lead to changes in trading patterns and, consequently, VIX levels.

What does the VIX data tell us?

One would have expected the VIX to be conspicuously elevated in average, median or modal terms from May to November, reflecting the seasonally weak period in the S&P500. The data do not support this assumption:

	Minimum	Mode	Median	Average	Maximum
May till November	9,14	13	17,3	19,48	80,86
December till April	9,15	13	17,66	19,42	82,69

The first striking feature is that nothing is unusual or indicative of a pattern, unexpected or out of line. With the exception of minor variations that occur in any statistical analysis, there is no evidence that the VIX is subject to a seasonal effect. The largest deviation of any month from the median over the last 30 years in the VIX is only 5%, and in the average the largest deviation is in October with a spike of 10%.

The second striking feature is that the most frequent value of the VIX between 1990 and 2021 was an index level of 17 in the month of June. This is unusual as the modal value is between 12 and 13 throughout the year. February(15), March(14) and October(15) also deviate from this pattern, but not to the extent of June.

June’s modal value is 25% higher than the modal value for the whole year. Assuming that the summer months are generally more volatile than the rest of the year due to lower trading volumes, not only June but also July or August should show elevated values. June and August do not stand out with a modal value of 13.

Why is there no seasonal pattern in the VIX?

One possible explanation is that seasonality is not sufficiently pronounced in the stock market. Any examination of data series will reveal supposed patterns. I am sure that if one were to look at stock market returns in the light of the lunar cycle, the inclined observer would be able to see patterns in them as well. In other words, it could just be a coincidence and the stock market saying “Sell in May and go away, but remember to come back in December” could also be wrong for the stock market.

Second, it helps to ask why there might be seasonality in the VIX at all? For commodities such as oil, gas or coal, seasonal price changes can be explained by increased demand during the northern hemisphere winter. For agricultural commodities such as grains, rice or soybeans, seasonal fluctuations are caused by harvest cycles. As for the demand for options, which the VIX reflects, I cannot think of any reason why it should be higher in January than in June or at the end of the year.

Conclusion

In conclusion, the debate over seasonality in the VIX is a testament to the complexity of financial markets. While some argue that seasonal patterns influence the VIX, a closer examination of the historical data suggests otherwise. The VIX, a real-time market index driven by options prices on the S&P 500 Index, appears to defy consistent seasonality trends.

The lack of clear and significant seasonality in the VIX challenges the notion that predictable, calendar-based factors significantly influence market volatility. Unlike commodities or agricultural products with well-established seasonal patterns, the demand for options, the VIX, doesn’t have a clear seasonal bias.

As a result, traders and investors can take away an important lesson: when it comes to trading volatility, it’s important to focus on data-driven analysis, market fundamentals and current events, rather than relying on calendar-based assumptions. Ultimately, the VIX remains a valuable tool for assessing market risk and investor sentiment, but its behavior appears to be less influenced by the calendar than some may believe.