Higher volatility is here to stay

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.

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

  1. The current position in the business cycle
  2. Market uncertainty and risk aversion
  3. 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.

To read the full article, please click here