Friday, December 25, 2015

Macro : The Year of Volatility (That Was Not)

2015 was supposedly the year of the comeback year of the volatility.

And no it did not, we had some occasional jitters, but mostly volatility in most asset classes, measured in standard manner, are in line with long dated averages, realized, as well as implied (say for example VIX for equity, Deutsche Bank CVIX for currencies and BoAML MOVE for treasuries).

But what we did see was a comeback of vol of vol instead. See the charts below. They plot rolling averages of number of weeks with 1.5x move (compared to recent weekly realized vols), on a longer range (2000 till date, left hand side) and a zoomed in version (2010 till date, right hand side).

What we have seen in 2015 is a definitive spike in days with large moves, in almost all asset classes, but with average volatility in line with long-run history.

Additionally there is a large divergence in this pattern across asset classes. Historically volatility tends to spike (following major events) across asset classes simultaneously. The current divergence we observed beginning in 2015 is unprecedented in terms of the degree.

This is quite different than the last hike cycle of 2004, perhaps driven by diverging monetary policies. Alternatively vol as an asset class no longer captures a single risk factor and relates to asset specific risks. Liquidity in rates? re-balancing in commodities? may be even HFTs in equities? - at this stage, we can only guess.

This means if this continues, those risk-factor based investors are going to find it difficult to generate consistent and commensurate returns as pricing gamma becomes more difficult. The upshot is for tactical and discretionary asset agnostic investors, who will have it easier to insure short gamma strategies (by selling the richest gamma and buying the cheapest in another asset class).

No comments:

Post a Comment