Taken together, the results point to a clear divide. VIX-related uncertainty is primarily a short-term phenomenon, while policy uncertainty plays out over longer horizons, reflecting the slower-moving nature of macro and policy change.
The VIX reflects market-priced fear. When it rises, investors are paying for protection, and that corresponds to higher near-term risk — deeper drawdowns and lower hit rates. Although returns can be strong following elevated VIX, the path is more volatile and the advantage fades over time.
EPU, by contrast, captures policy noise. It shows little consistent relationship with downside risk, with drawdowns broadly similar across regimes and, at times, even larger following periods of low policy uncertainty. Its signal is more evident in long-term returns than in risk.
In practical terms, the VIX is a useful measure of market risk but a weak predictor of returns, while EPU provides some insight into long-term returns but offers limited guidance on risk.
Confusing the two can lead to systematic errors — becoming overly cautious when policy uncertainty is high, but markets are stable, and insufficiently cautious when markets are actively pricing in fear.
