Traders often expect market volatility to cool around Christmas in a “Santa Claus Rally” before rising after. But, looking at the VIX, MOVE, GVZ and EVZ, there appears to be more to it than just that.
You might have come across the so-called “Santa Claus Rally” theory, which is typically defined as a push higher in equities that occurs leading into the Christmas holiday on December 25th. The latter brings up disagreements between traders and financial intuitions about which specific days/weeks such a rally could occur.
Then, as we get past the holidays, volatility should theoretically come back online, producing a “U-“ or “V-” shaped pattern”. At least, this is the general idea that most traders may have in mind. As we are about to find out, however, there is more to it than that. In fact, data over the past few decades seems to suggest that there is more of a “double-dip” or “W-shaped” phenomenon going on., MOVE, GVZ and EVZ for equities, bond markets, precious metals and currencies, respectively.
The first step seems to confirm the “Santa Claus Rally” theory, and it shows the VIX cooling in the weeks leading to Christmas. Then, the second step shows volatility rising in the days after. Finally, about 4 days after Christmas, or around New Year’s, volatility cools down again, but it is very slight. What about other markets?
The MOVE index is essentially the bond market equivalent of the VIX, used to measure US interest rate volatility. Similarly to the VIX, MOVE tends to decline in the days leading into Christmas, on average. But, the decline is not as pronounced as the VIX. After the holiday, we see an uptick in volatility for a few days. Finally, around the 5th day, we see a second dip in volatility. The latter is more pronounced than what is seen in the VIX.
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