Does Market Fear Forecast U.S. Economic Activity During the COVID-19 Crisis? Evidence from Time-Varying Asymmetric Causality and Wavelet Quantile Correlation Models

Abstract This study examines whether past values of the Chicago Board Options Exchange’s (CBOE)’s volatility/investor fear index (VIX), can forecast the future values of US weekly economic activity (WEA) index over the initial 59 weeks of the COVID-19 pandemic, beginning on 20 January 2020. Using Hatemi-J time-varying, symmetric and asymmetric causality tests together with wavelet quantile correlations (WQC), we assess both short- and long-horizon predictive dynamics. The Hatemi-J symmetric and time-varying causality test shows a potential predictive link from VIX to future WEA, whereas the asymmetric and time-varying causality tests show that changes in investor fear did not predict subsequent economic disruptions or recoveries. By applying the wavelet Granger causality on the daily data of VIX and financial stress index (FSI), we find evidence that VIX did not have causal impacts on FSI for any frequency except the long-run. Furthermore, the results from the WQC show both quantile-varying and time-varying correlations, with short-run (2–4 and 4–8 week) correlations contradicting the conventional theory linking uncertainty to economic activity. Overall, the findings indicate that VIX offered limited real-time forecasting value during the early pandemic period, highlighting the need for caution when using fear indices as leading indicators under extreme uncertainty.