Relative volatilities of different asset classes


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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.


Why volatility?


While prices and economic indicators move in different directions at different times with correlations changing and decaying, the general level of movement is more easily observed and can lend itself to an “apples to apples” comparison across different domains in societal affairs.

Financial volatility, is observable, implied in optionprices or calculated from historical logarithmic returns.

After almost 200 years of advanced financial markets they might teach us something.




Knowing the price of everything but the value of nothing might be the trait of the cynic if you read Lady Windermere’s Fan (Oscar Wilde 1892), but as prices are not the most important things in life they bring about the possibility to comprehend societal dynamics unfold on a global scale. The vision of Worldvolatility is to capture such dynamics using quantitative methods.