Category Archives: relative volatility

Historic check of treasury and equity volatility since 1973

19 Thursday Nov 2015

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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.

/Daniel

 

2015-11-19-1973

Equity volatility continuing upward

19 Thursday Nov 2015

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S&P500 volatility changed to Nasdaqcomposite volatility as benchmark for dollar denominated equity volatility. Nasdaqvolatility is leading changes in S&P500 volatility on a number of occasions in the last 40 years that is the reason for the change. Just like S&P500 it has been moving upward in the last weeks. Treasury volatility moving close to historic lows and opposite to equity volatility in the last weeks. Uncertainty about Fed rate hike cycle might be somewhat less than a month ago and might contribute to lower treasury volatility. Both volatilities are always scaled to yearly volatilities for comparison.

2015-11-19

 

 

 

Equity volatility rising

08 Thursday Oct 2015

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After the Yuan devaluation and very difficult times for many emerging markets, the Volkswagen scandal hits and the equity volatility rises. VIX also seems to be finding a new higher normal around 20-25 after spikes >30. Treasury volatility calmer than equity in this environment and not reacting as much to the upside. One factor that keeps treasuries calmer is the fact that in Yuan terms the return is a little bit better after the devaluation.

2015-10-08

Relative volatilities of different asset classes

26 Sunday Oct 2014

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smoothed 13v price volatility

“Changes in the volatilities of different asset classes are significantly positively correlated,” says Ray Dalio and it seems from the Picture above that there seems to be more than an ounce of truth in that. With a correlation of 0,96 anchoring the volatility of S&P500 and 10 year treasuries in the last 8 years, it seems quite uniformly dispersed across asset classes, at least for equity and treasuries. The absolute level of volatility is harder to explain, for example the peak in 2009. One of the main pillars of “Risk parity investing” is that the relative volatilities hold under different economic environments. (The relative volatility of S&P500 and US10Y is averaging 1,73 above, this implies an average structural duration for Equity of about 27,2 years. With the 10 year treasury having a duration of 9,1 years and volatility being proportional to the Square root of time. 9,1*1,73^2=27,2 years). Risk parity investing seems to make sense at least over this short period of time (2006-2014).Even if the absolute level of volatility is not needed in risk parity investing it is still very fascinating and might capture some societal dynamics unknown today.