Four Potential Causes Of Low Volatility

With low volatility, some investors think this market environment is like the calm before the storm. This is a significant issue among investors to whom Bernstein speaks. What is causing these low Vix index levels? In a May 16 report quantitative strategy report, Bernstein’s Inigo Fraser-Jenkins and a team identify four potential issues, then make a global observation regarding an investing world put to sleep and weigh in on including a short volatility strategy in a portfolio.


Low VIX Index level is the hot topic of conversation

The benign volatility regime that has beset stock investors, with the CBOE VIX breaking into single digits amid a world surrounded by fundamental risk  potential, has been the subject of much discussions and analysis recently.

With implied volatility levels at “unusually low” levels, it is has become a consistent worry of its own. In recent client meetings, low volatility is an issue that “provokes the most unease,” Fraser-Jenkins noted.

While many have found it odd that volatility is so low, the Bernstein report looks for causation to help explain the aberration for what they describe as an “endemic” lack of volatility.

Low VIX Index – Four potential causes

Is there some causation for the benign volatility or is it just “shocking complacency” on the part of investors?

After sifting through various causation points, Bernstein arrives at four possible explanations to explain the historical aberration: (1) genuinely benign macro, (2) complacency by investors, (3) central bank asset buying (4) investors being unusually short vol.

Taking a step back from only looking at the stock market, Bernstein realizes that volatility across the board has dropped. Implied volatility for stocks has dropped on a global basis along with volatility in commodity and currency markets as well. Investors across the globe are not making rash decisions that would send assets dramatically higher or lower.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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