Entering 2015, there continues to be a steady rise in equity volatility eruptions, since the announcement of Federal Reserve tapering (near the end of 2013). And market participants are now more accustomed to higher volatility, and more frequent down days. But these two logical concepts do not necessarily perfectly overlap, as can be seen here through our discussion of risk statistics. We can see the gradual changes in the monthly perceived volatility, and track how the lower values have changed versus how the higher values have changed. In the illustration below, we see that monthly implied volatility lows (in blue) are just now slowly stabilizing - at still cyclically low levels. While the monthly implied volatility highs (in red) are certainly picking up, but this is due to a slight increase in the occurrence frequency of market volatility eruptions.
Note that in the chart above, the dotted lines are not meant to represent trends but rather the history of the broad semi-annual levels. And of course in each semi-annual period, there are a data cluster of six monthly lows and also six monthly highs.
So while the height levels of stock market fear are now typically approaching the ne plus ultra levels we generally saw prior to 2012 (or prior to the major Federal Reserve easing program popularly referred to as "Operation Twist"), the output is subtle. For example, if we remove outlandish values from our time series then this entire recent pick up in trend mostly disappears. Also notice in the earlier period of the chart above, how the monthly highs and monthly lows were both at generally high levels, with their respective values much closer to one another. Another way of putting this is that one can even see the white void between the tight red and tight blue clusters, but only on the earlier part of the chart above. Of course market participants might be conflating tail risk in equities, and tail risk in other asset classes. As we completed 2014 for example, the stock market often still made record highs even as there were genuine tail risks outside of it (to the upside in bonds, and the downside in commodities). Either way, as sometimes is true with markets, current investors should be cautious as anything can happen given the current asset price levels.
Finally, last week I was accepted to the Editorial Panel for the American Statistical Association. A peer-reviewed academic journal (open source, which is how many of them are presumably going). Along with everything else I will be working on this year, I will be busy scouting talented, academic writers and referees (please advise if you know anyone who may be interested!) My personal focus is on the large junction between statistics and public policy. There will be more details on this prestigious opportunity, later.
So while the height levels of stock market fear are now typically approaching the ne plus ultra levels we generally saw prior to 2012 (or prior to the major Federal Reserve easing program popularly referred to as "Operation Twist"), the output is subtle. For example, if we remove outlandish values from our time series then this entire recent pick up in trend mostly disappears. Also notice in the earlier period of the chart above, how the monthly highs and monthly lows were both at generally high levels, with their respective values much closer to one another. Another way of putting this is that one can even see the white void between the tight red and tight blue clusters, but only on the earlier part of the chart above. Of course market participants might be conflating tail risk in equities, and tail risk in other asset classes. As we completed 2014 for example, the stock market often still made record highs even as there were genuine tail risks outside of it (to the upside in bonds, and the downside in commodities). Either way, as sometimes is true with markets, current investors should be cautious as anything can happen given the current asset price levels.
Finally, last week I was accepted to the Editorial Panel for the American Statistical Association. A peer-reviewed academic journal (open source, which is how many of them are presumably going). Along with everything else I will be working on this year, I will be busy scouting talented, academic writers and referees (please advise if you know anyone who may be interested!) My personal focus is on the large junction between statistics and public policy. There will be more details on this prestigious opportunity, later.
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