Linear Empirical Analysis of the Impact of Market Volatility on Investment Return

Abstract

This study investigates the dynamic relationship between financial market volatility and investment returns using an augmented econometric framework. Motivated by global market uncertainties from geopolitical conflicts, monetary policy shifts, and pandemic disruptions, we construct a multivariate regression model incorporating the CBOE Volatility Index (VIX) as a primary volatility proxy, while controlling for macroeconomic fundamentals like GDP growth, inflation, and interest rates. Using data from 2019 to 2025, we find three key results: (1) The VIX shows a statistically significant negative impact on investment returns, indicating that higher volatility suppresses returns. (2) The effect of volatility is three times stronger during crises (e.g., COVID-19) compared to normal periods. (3) While GDP growth positively correlates with returns, this relationship weakens significantly when volatility exceeds historical norms, suggesting reduced predictive power of macroeconomic fundamentals during extreme turbulence. These findings highlight the importance of cautious investment strategies during volatile periods and the need for policymakers to ensure market stability for sustainable economic growth