VIX and the equity markets - equities drive volatility

 

We know that there is a correlation between the VIX and SPX. A spike in volatility will be associated with lower equity returns, but the next question has not been fully explored. What is the direction of causality? A recent paper looks at this specific question, see "Which way does the wind blow between SPX futures and VIX futures?". The authors look at Granger causality tests with the method of identification through heteroskedasticity and find that the SPX futures is causally prior to the move in VIX futures. There will be a shock in new information that impacts the equity futures which then moves to the volatility futures. The authors do a good job of looking more closely at the data across some key time periods to find the correct causal relationship.