Alternative chart of the week

13 Jan

There was a close second for this week’s chart: equity implied volatility – that is, the relative cost to protect against market falls from the current level – has fallen back to levels last seen in mid-2007, and there are several charts that illustrate this quite well. Firstly, the VIX Index as shared by @William1

Secondly, and in my view more significantly, the 1 year implied volatility of FTSE 100, S&P500 and Eurostoxx :


The reason this is more significant than the VIX is that the VIX represents 1-2 month maturity options on the S&P 500 index, and while it is indeed at low levels, it is also true that there have been multi-month periods in the last 5 years where volatility has been realised at those low levels. However, there have not been whole year periods where the same can be said.

Of course it is true that banks and other systemically important institutions are much less leveraged and arguably better capitalized than they realistically were in 2007, however its still clear that many risks remain. One wonders however given the ability of governments around the world to effectively “kick the can down the road”, is it likely that we will see as acute a market response as we did in 2007-2008 ? If so, what will be the catalyst: plenty of event-risk has come and gone with respect to the Eurozone situation and the US fiscal situation with neither a resolution nor a substantial increase in volatility.

However, history suggests that even if we cannot identify them now, such catalysts are bound to materialise through time and more likely than not in the next year, ie during the lifetime of those options on the FTSE 100 index that can currently be bought at prices which imply a volatility of around 15% for the next year.


One Response to “Alternative chart of the week”


  1. Financial Conditions : Back to early-2007 levels ? « chartoftheweek - January 22, 2013

    […] This comes at a time when realized and implied volatilities across equity and commodity markets are close to 6 year lows (for example see here). […]

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