Worldvolatility at 4,89% in USD terms

After a wild February in the equity markets the Worldvolatility have risen to 4,89% in USD terms. The move felt dramatic and some reverse VIX ETF:s have been wiped out. In situations like this the Worldvolatility can sort out wheter the move is significant for the financial system as a whole. The short answer is that it has not been a dramatic move when looking at gold, treasuries and equity like Worldvolatility does. The increase in the level of the Worldvolatility is there but the dramatic move in the equity markets have been cushioned by far smaller moves in treasuries and gold.

4,89% is a low level historically as we can see below.


Why truncation of x axis in bottom graph at 4%?

Answer to readers about graphs:

The top graph shows the evolution of the worldvolatility since 1974. An empirical observation that can be easily seen is that the values seem to stop decreasing around 4%. Why at 4%? That is unknown at this point, but it seems to hold as a worldvolatility low.

The bottom graph is just a zoom (in the long graph from 1974) from the last time the worldvolatility hit a 4% low , which was in the summer of 2014. The truncation of x axis at 4% is just to get a close up on the evolution of the worldvolatility.

So both graphs show the same evolution of the Worldvolatility, the bottom one being the close-up and the top one being the “big picture” from 1974.

Worldvolatility at 4,59% in USD terms

The Worldvolatility have taken a sharp step down with equityvolatility hitting historical lows. The volatility of the treasuries are approaching really low levels but still have some way to go to historical lows sat at July 14th 1978. Back then the extreme calm of the treasuries were followed by extreme monetary events in the following years with the Worldvolatility spiking at 17,53% in October 15th 1982. In the close-up below (bottom graph) we can see that if the Worldvolatility is moving any lower now it is likely to approach the historical lows around 4% for the 9th time since 1974.

Worldvolatility at 5,47% in USD terms

The Worldvolatility still resides in the lower range of the uptrend that started in 2014. A low reading at 5,27% occured in the beginning of July before the North Korea story broke out. The Worldvolatility stands today at 5,47%. The period since 2014 is starting to look a lot like the late 1990s. Back then the Worldvolatility went sharply from around 6% to 8% before Nasdaq broke in March of 2000. A sharp increase(say before Q4 2018) up to 8% from where we are now would look a lot like 1999 all over again. Right now it is too early to say if this will happen.

Worldvolatility at 5,59% in USD terms

The risk parity weighted asset volatility (the Worldvolatility) stands at 5,59%. This is clearly within the normal range since the early 1970s. The 8th low at around 4% since 1974 occured in 2014 and from this low reading a clear uptrend can be seen until today. This can still be seen as mean reversion and the Worldvolatility have many levels to pass on the upside before it can be said to be high. In other words: -We live in a “normal” world at the moment resembling the late 1990s.

The risk parity weighted asset volatility

The path towards creating a worldvolatility have now reached the stage of an assetportfoliovolatility. The portfolio assets are :US 10 year treasuries, NASDAQ and gold. The portfolio is risk parity weighted and weekly rebalanced to capture actual experienced voll by the biggest asset managers in the world.

The last little increase looks small but captures the uptick in volatility after Brexit. The next phase towards worldvolatility will be some method to capture changing monetary regimes, with the China SDR inclusion in late 2016 being an example of a change of this type.

Aug21th 2016

Nasdaq+10y treasury portfolio volatility: 5-20%

The 50-50 Nasdaqcomposite-10y treasury  continually dollar-rebalanced portfolio shows a range for the the historical volatility. 5% sets a floor in the post bretton-woods world. 20% annual volatility seems to be as bad as it can get at least in dollar terms. The equity market and the treasury market represent the most important claims in the financial world and in dollar terms they only deviate this much for the holder of the 50-50 portfolio. These claims can be said to be proxies for claims on the american public and private sectors respectively. For the holder of claims on both sectors the volatility moves in this range: 5-20%.


Historic check of treasury and equity volatility since 1973

The historic check of Nasdaq and 10year-treasury volatility shows a range of normality for these measures. Treasury volatility seem to be “calm” around 5% and that sets somewhat of a floor. Nasdaq volatility seems to have around 10% as a floor at least in post-coldwar world from the nineties and forward. Upper level obviously harder to pinpoint. Both these series are slightly leptokurtic (fat tail distributed) with Treasuries being more leptokurtic over the 42 year period with only one big spike in volatility.

The series looks to be working in “alternating-fashion” in a way with big spikes in one being “safeguarded” by calm in the other. This being brought about by portfolio manager behaviour and central bank behaviour over different periods with different investing fashions in vogue, for example the Volcker-moves of the early eighties by Fed and risk parity investing today.

Is this a reasonable basis for a “worldvolatility”? After researching financial time series and various kinds of societal time series for 20 years my view is that it is.