Volatility Spikes Are the Market’s Best Buy Signal, 98-Year Study Finds

Stocks often rebound sharply after extreme bouts of market volatility, according to new research examining nearly a century of market history and structural shifts in modern trading systems.

The study, authored by Justin Detray, advisor and managing director at Wealthspire Advisors, finds that severe volatility spikes in the modern derivatives-driven market frequently mark attractive entry points for long-term investors.

Detray’s research, covering U.S. equity market data from 1928 through 2026, identifies a dramatic shift beginning in the early 1980s. Before the widespread introduction of index options, volatility surges carried little predictive value for future returns. But in the decades since derivatives markets expanded, sharp spikes in volatility have often preceded powerful market recoveries.

The change reflects a fundamental transformation in market structure rather than investor psychology, according to the research. The launch of index options on the Chicago Board Options Exchange in 1983 enabled institutional investors to hedge broad market exposure using derivatives, creating feedback loops that can intensify short-term price swings.

When markets fall abruptly, investors often rush to buy protective put options. Dealers who sell those options hedge their positions by selling stock index futures, which can accelerate declines. At the same time, systematic investment strategies—including volatility-targeting funds and risk-parity portfolios—frequently reduce exposure when volatility rises, adding further selling pressure.

“Volatility spikes in the modern era are increasingly driven by positioning mechanics rather than economic fundamentals,” Detray said.

Rising volatility can also trigger margin pressure across the financial system. Clearinghouses and brokers typically increase collateral requirements as market swings intensify, forcing leveraged investors to liquidate positions to meet margin calls.

Read:

• Volatility Regimes and Forward Equity Returns: A Hybrid Framework Using Realized Volatility, Implied Volatility, and Margin Stress Indicators (1928–2026)
• Quantitative Validation and Expansion of the Hybrid Volatility Framework (1928–2026)

Together, these dynamics create what the research describes as a “mechanical deleveraging loop.” Prices can overshoot to the downside as traders are forced to unwind positions, even if the underlying economic outlook hasn’t deteriorated proportionally. Once the cascade of forced selling subsides, markets often rebound quickly.

Historical data in the study show that since the options era began in the 1980s, entering the equity market during extreme volatility events produced positive returns roughly 88% of the time over the following year, with average gains exceeding 20%.

The research suggests investors should distinguish between volatility driven by market mechanics and volatility tied to fundamental financial stress. In crises rooted in systemic economic deterioration—such as the 2008 financial crisis—the recovery can take longer.

Still, Detray argues that many modern volatility spikes stem from positioning and liquidity dynamics rather than lasting economic damage. In such cases, extreme market fear may represent not just risk, but opportunity.