“We Are Living In A Different World”: BofA Can’t Explain What Is Going On With Volatility

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Zero Hedge
July 17, 2017

With the VIX once again pummeled on Friday and set to open below 10 yet again, here are some statistics from Kyle Beard of Bloomsbury advisory: “The VIX has only traded below 10 41 times since 1993 (intra-day). 21 of those occurrences have taken place since May 1, 2017. When you consider there have been 6,179 trading days since 1993, you realize how incredible this is.

By the numbers:

However, it’s not just the VIX: as BofA’s David Woo points out, volatility across financial markets has collapsed in recent months:

  • The MOVE index, which measures interest rate volatility across the US yield curve, is hovering just above the 52 level that represents the trough of the index since 1988. Only in 2007 and 2013 was the index lower, and only barely.
  • VIX has again dropped below 10. The only time it was lower since the inception of the index in 1990 was briefly in 1993.
  • 3-month EUR/USD vol is now below 7. Since the inception of the euro, EUR/USD vol was only lower twice, in 2007 and 2014.

BofA aggregates these volatility measures by first taking z-scores of the individual measure and then taking an average of the three series. The results are shown in the chart below. The aggregate volatility measure is near its lowest level in twenty years.

As the chart above shows, there are only two other periods during which volatility was as depressed as it is right now:

  • Early 2007: The consensus at the time was that the Fed had completed the tightening cycle (the last hike was in June 2006) and was likely to remain on hold for the foreseeable future.
  • Early 2014: The consensus at the time was that after the end of the winding down of QE4, the Fed would be in a holding mode for an extended period.

Woo then notes that what these two episodes have in common “was that the Fed was seen as either done with hiking rates or still far away from starting to hike rates” and adds…

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