Do Tightening Cycles Amplify the Negative Effect of VIX Shocks on U.S. Bank Stock Returns?
Abstract
This study examines whether monetary tightening amplifies the negative effect of VIX shocks on U.S. bank stock returns. Using daily public data from January 2010 to March 2026, the analysis constructs a panel of returns for four exchange-traded funds: KBE, KRE, XLF and SPY. Large increases in the CBOE Volatility Index are treated as episodes of market fear and risk repricing. A tightening regime is defined as a trading day on which the effective federal funds rate has increased by at least 25 basis points over the previous 90 trading days. The baseline factor-adjusted regressions show that the interaction between VIX shocks and tightening regimes is significantly negative. In the preferred KBE specification, a VIX shock during a tightening regime is associated with an additional daily excess return of approximately -0.278 percentage points. Heterogeneity tests indicate that this effect is concentrated in bank ETFs, especially the regional-bank ETF KRE, and is not significant for the broader financial-sector ETF XLF or the market ETF SPY. Event-window evidence shows lower five-day cumulative excess returns for KBE and KRE after VIX shocks in tightening regimes. The findings provide conditional asset-pricing evidence on bank equity risk under monetary tightening.