All posts in category: Volatility (29)

Comforting Conclusion

Wednesday, May 24th, 2017

Low volatility not always followed by an explosion

We are now very close to the all-time low on our index of multi-asset volatility, but setting a new record is not really important. What matters is how quickly we revert to the median and what leads us higher. Previous episodes suggest that the reversion takes 8-10 months and is led by US High Yield and US REITs. The numbers also suggest that global equities could correct by 10-15% without significantly damaging investor psychology.

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Bi-Modality

Thursday, May 4th, 2017

US volatility has a split personality

The frequency distribution of realised volatility for US equities is bi-modal, which suggests there are two overlapping risk-regimes, rather than one continuous one. This would make the US different from the rest of the world and increase the potential for a non-linear market response to an incremental policy action by the Fed.

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Parlour Games with Volatility

Wednesday, March 8th, 2017

Curious and unsustainable sector effects

The new ultra-low volatility regime throws up some curious implications for equity sectors. Who knew that US Technology and EU Industrials are now attractive to risk-averse investors? What about Healthcare, which could deliver significant returns if investors were just prepared to give it the benefit of the new paradigm.

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Ultra-low Volatility

Wednesday, February 22nd, 2017

But maybe not for much longer

Our global volatility index has just hit a two-year low, but US equities are no longer leading this and are now in a counter-trend, whose strength is disguised by a breakdown in sector correlations. The period of ultra-low volatility is not over yet, but it may not last much longer.

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Goldilocks returns

Wednesday, January 18th, 2017

But nobody can see her

We stay with our early-year focus on volatility. Many commentators have focussed on the potential for political shocks, but we may be on the verge of an ultra-low volatility regime similar to the Goldilocks period of 2006 and 2007, consistent with abundant liquidity, accelerating growth and fiscal stimulus in many developed economies.

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Low Hurdle

Wednesday, January 11th, 2017

Excess volatility set to stay near historical lows

Many analysts cite a possible break in the regime of low volatility as a potential threat to the performance US Equities. They are right, but they only have half the story. A rise in equity volatility only matters if it is NOT accompanied by a rise in Treasury volatility. If it is, there is no change to the hurdle rate which determines the risk-efficiency of equities relative to bonds.

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Dodging a Three-Tonne Truck

Wednesday, November 2nd, 2016

Financials rally could be painful

Financials are rallying fast, driven by a significant decline in volatility in the US and the UK, which is exactly what our models expect. We don’t know whether this is justified by fundamentals, but we do know that every investor with an underweight position will have to consider reducing the risk relative to benchmark, sooner or later.

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Vanishing Vol and Risk-Parity

Wednesday, July 27th, 2016

Following the Fed doesn’t make you money

One of the main reasons for the new high in US equities is the sharp decline in the volatility of their returns compared with those of other asset classes. Any institutional investor with a formal risk-budgeting approach will be forced to allocate more money to them, having not owned them when they were riskier, but cheaper. This looks dangerously like a “buy high, sell low” strategy.

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