The bold place bets on the VIX
For investors who can stomach the risk, Wall Street’s ‘fear index’ leads to potential gains
Since Wall Street’s “fear index” spiked in April, even casual investors have watched it nervously for signs of whether to buy, hold,, or run for their lives.
The CBOE Volatility Index, commonly known as the VIX, signals the market’s expectations for volatility over the coming 30 days. When the VIX rises, investors expect steeper ups and downs. When it falls, it suggests calmer conditions.
In early April, the VIX did both. It hit 60 — for the first time since the COVID-19 pandemic — after President Donald Trump announced worldwide tariffs. After most tariffs were paused, the index slid to 17 by mid-June.
In new research, Ehud Ronn, professor of finance at Texas McCombs, tests a long-held belief about the VIX: that volatility can be profitable. Over time, the theory goes, the market tends to reward higher levels of systemic risk with higher returns.
Ronn finds that it does, but with some caveats. He offers fresh insights into how the index might factor into investment decisions.
With Liying Xu of Oklahoma Baptist University, Ronn compared VIX levels with subsequent realized returns for the S&P 500. They measured indicators on a daily, weekly, and monthly basis over periods of two, four, five, and 10 years from 2012 to 2022. They found that generally, the higher the VIX, the more robust the ultimate returns.
“We were able to show that subsequent returns were indeed higher,” says Ronn. “In other words, if you have the financial and intestinal fortitude to step up to the plate when everyone else is headed out the door, on average you will be rewarded for taking on that risk.”
Hold, Don’t Sell
The researchers also evaluated a contrary approach proposed by another researcher: lowering equity exposure in times of higher volatility. He proposed that when the VIX rises above 30%, an investor should reduce the percentage of stocks in their portfolios. They should buy back in once volatility dies down.
Ronn and Xu simulated that strategy for 29 historical episodes in which the VIX exceeded 30%. They found that the portfolio underperformed the market. Says Ronn, “The proposed solution is not something that investors should follow.”
Instead, he says, the average investor does better to stand pat when stocks fall and the VIX climbs. In his simulation, holding stocks through episodes of high volatility produced a 10.9% higher annualized return than selling and buying back.
“Decide on the fraction of stocks, bonds, and cash you’re comfortable holding, and then don’t respond to every little twitch in the market,” he says.
He has different advice for one group of investors: those with high appetites for risk. “When the VIX is high, invest, because on average you will be compensated,” Ronn says.
“But that really does take guts, because you just don’t know beforehand when the VIX will peak and the market will trough. If I knew that, I’d be retired in the Riviera right now.”
“Is VIX a Contrarian Indicator? On the Positivity of the Conditional Sharpe Ratio” is published inEconometrics.
Journal
Econometrics
Article Title
Is VIX a Contrarian Indicator? On the Positivity of the Conditional Sharpe Ratio
Firms raise the bar after missing the target: Strategic use of overestimated earnings targets
Researchers find that firms inflate future earnings targets after misses; 65% miss again, but stock prices still rise
THE HOUSE ALWAYS WINS
image:
After missing earnings goals, many firms set even higher targets to shift investor focus toward a brighter future, despite a 65% failure rate. This infographic shows how companies use overly ambitious forecasts as a strategic tool, and how institutional investors, analysts, and female directors help keep them in check. Based on a study of 3,273 Japanese firms by researchers from Japan and Korea.
view moreCredit: Professor Konari Uchida from Waseda University
When companies miss their earnings targets, one might expect them to lower expectations and rebuild investor trust slowly. However, many do the opposite. They announced even higher goals for the next period. A team of researchers, led by Professor Jungwon Min from Inha University, South Korea, including Professor Hyonok Kim from Tokyo Keizai University and Professor Konari Uchida from the Graduate School of Business and Finance, Waseda University, Japan, published a new study online in the journal Review of Managerial Science on June 03, 2025. It uncovers how firms strategically use these inflated projections to manage how stakeholders perceive them.
Analyzing data from 3,273 publicly listed Japanese firms over 12 years, the researchers found a consistent and deliberate pattern, i.e., companies that miss their earnings targets often respond by setting overly optimistic goals for the future. The study reveals that about 65% of these ambitious targets are missed, suggesting that many firms knowingly set difficult goals to achieve. Surprisingly, this tactic often pays off, at least in the short term. “Despite recent target misses, stock prices respond positively to these overestimated targets,” said Uchida.
The researchers explain that this behavior falls under what’s known as organizational impression management—a set of strategies companies use to shape how they are perceived, especially after failures. To test this behavior, the researchers used Japanese firms’ annual management forecasts—self-set earnings targets that companies are required to release. This regulatory feature provided a unique opportunity to study how companies adjust expectations immediately after reporting their actual results. The study revealed that overly optimistic targets tend to follow disappointing performance, suggesting a direct link between past failure and future promises.
But not all companies follow this pattern. The research also identified important moderating forces that help keep such overly ambitious goal-setting in check. Large institutional shareholders and analysts, who are often better equipped to detect patterns and demand accountability, can dampen a firm’s tendency to reach too far in its projections. Female directors, who tend to comply with rules and ethics, also restrain the release of overestimated targets. Their scrutiny helps prevent a cycle of repeated disappointments masked by future optimism. Still, when left unchecked, this pattern can have broader consequences. As more and more targets are missed, stakeholders start to catch on—and that can change how the market reacts.
“As target misses accumulate, investors may begin to recognize the pattern of biased estimates from firms with repeated earnings shortfalls,” Uchida noted. “This growing awareness can prompt negative reactions that help constrain firms’ myopic behavior.” In this way, the market can begin to correct itself, punishing firms that continue to inflate expectations and rewarding those with more grounded forecasts. Yet until that point, many firms benefit from the short-term gains of looking forward instead of back.
More fundamentally, the study challenges the assumption that performance goals are always data-driven or shaped by peer benchmarks. “We also find evidence that firms actively shape their performance targets rather than passively accepting those dictated by past performance or peer benchmarks,” said Uchida. In a landscape where perception drives value and narrative can outweigh numbers, this research offers a cautionary tale that optimistic forecasts may not always reflect business potential; they might just be damage control.
***
Reference
Authors: Hyonok Kim1, Jungwon Min2, and Konari Uchida3
DOI: https://doi.org/10.1007/s11846-025-00910-0
Affiliations: 1Faculty of Business Administration, Tokyo Keizai University, Japan
2College of Business Administration, Inha University, South Korea
3Graduate School of Business and Finance, Waseda University, Japan
About Waseda University
Located in the heart of Tokyo, Waseda University is a leading private research university that has long been dedicated to academic excellence, innovative research, and civic engagement at both the local and global levels since 1882. The University has produced many changemakers in its history, including eight prime ministers and many leaders in business, science and technology, literature, sports, and film. Waseda has strong collaborations with overseas research institutions and is committed to advancing cutting-edge research and developing leaders who can contribute to the resolution of complex, global social issues. The University has set a target of achieving a zero-carbon campus by 2032, in line with the Sustainable Development Goals (SDGs) adopted by the United Nations in 2015.
To learn more about Waseda University, visit https://www.waseda.jp/top/en
About Prof. Konari Uchida
Dr. Konari Uchida is a Professor at the Waseda Business School specializing in corporate finance and governance. He received his Ph.D. in Economics from Kyushu University and previously held academic positions at the University of Kitakyushu and Kyushu University. He has also served as a visiting scholar at Stanford University, Arizona State University, and the University of Utah. Prof. Uchida has held leadership roles in major finance associations, including President of the Nippon Finance Association and Vice President of the Asian and Japan Finance Associations, and has served as Editor and Guest Editor for leading finance journals.
Journal
Review of Managerial Science
Method of Research
Observational study
Subject of Research
Not applicable
Article Title
Performance target setting for organizational impression management: overestimated earnings targets after previous target misses
Article Publication Date
30-Jun-2025
