Higher volatility is here to stay
Below summary of article written by Chris Walker
While the level of volatility between equities, fixed income and foreign exchange (FX) is historically quite uncorrelated, in more recent years, notably since the Lehman Brothers collapse, that has changed. What makes the last few years so peculiar is that equity, fixed income and FX volatilities are moving together, suggesting that a common set of factors are influencing them.
In our opinion, the factors causing this recent tendency for the volatility of these three asset classes to move in greater concert are
- The current position in the business cycle
- Market uncertainty and risk aversion
- Central banks’ unconventional policies
In light of these fundamentals and US monetary policy in particular, our analysis suggests that fixed income volatility currently appears in line with expectations, while equity and currency volatilities have overshot expected levels.
Overall, as US monetary policy normalises, realised equity, fixed income and currency volatilities should on average be higher at the end of 2015 than in 2014.
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Frequently Asked Questions about this Article…
Market volatility has increased due to a combination of factors such as the current position in the business cycle, market uncertainty, risk aversion, and central banks' unconventional policies. These elements have led to equity, fixed income, and foreign exchange volatilities moving together more than in the past.
Since the Lehman Brothers collapse, equity, fixed income, and FX volatilities have become more correlated, moving together due to common influencing factors like market uncertainty and central bank policies.
The synchronized movement of asset class volatilities is primarily caused by the current business cycle position, market uncertainty, risk aversion, and unconventional policies by central banks.
US monetary policy plays a significant role in current market volatility. As the policy normalizes, it is expected that the volatilities in equity, fixed income, and currency markets will be higher on average.
Yes, according to the analysis, current fixed income volatilities appear to be in line with expectations, unlike equity and currency volatilities, which have exceeded expected levels.
By the end of 2015, it is expected that realized volatilities in equity, fixed income, and currency markets will be higher on average compared to 2014, as US monetary policy continues to normalize.
Risk aversion contributes to market volatility by increasing uncertainty and causing investors to react more strongly to market changes, thereby affecting the volatilities of various asset classes.
Central banks' unconventional policies impact market volatility by influencing investor behavior and market dynamics, leading to more synchronized movements in equity, fixed income, and FX volatilities.
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