Taken collectively, the outcomes level to a transparent divide. VIX-related uncertainty is primarily a short-term phenomenon, whereas coverage uncertainty performs out over longer horizons, reflecting the slower-moving nature of macro and coverage change.
The VIX displays market-priced concern. When it rises, traders are paying for defense, and that corresponds to larger near-term danger — deeper drawdowns and decrease hit charges. Though returns could be robust following elevated VIX, the trail is extra unstable and the benefit fades over time.
EPU, in contrast, captures coverage noise. It reveals little constant relationship with draw back danger, with drawdowns broadly related throughout regimes and, at instances, even bigger following durations of low coverage uncertainty. Its sign is extra evident in long-term returns than in danger.
In sensible phrases, the VIX is a helpful measure of market danger however a weak predictor of returns, whereas EPU gives some perception into long-term returns however affords restricted steerage on danger.
Complicated the 2 can result in systematic errors — turning into overly cautious when coverage uncertainty is excessive, however markets are secure, and insufficiently cautious when markets are actively pricing in concern.
