Quick Take: The Volatility Markets View on Crisis Duration

Authored by

  • Clifton Hill

    VP, Portfolio Manager, MACS

  • Aditya Panda, FRM

    VP, Assoc. Portfolio Manager

  • Ram Thirukkonda, CFA

    SVP, Senior Investment Strategist, Client Advisory

The Market Expects Explosive Near-Term Volatility…

  • Global equity markets exploded in volatility last week as COVID-19 became a worldwide pandemic and uncertainty over its economic impact grew. The VIX shot up to 75 on Thursday, March 12th, near its GFC highs, consistent with an expectation of roughly 5% daily market moves over the coming month.

…and Prolonged Instability

  • Beyond an indicator of near-term fear, option prices also provide clues as to the market’s expectation of crisis duration. The top chart traces out recent changes in option market expectations of volatility looking forward over several periods, the coming month, 1–2 months, 2-3m, and 3-6m ahead (similar to forward interest rates).

  • The chart shows that over the past several days the market has come to expect a more protracted crisis. At the beginning of March, 1-month expectations of volatility (dark blue) were very high relative to their historical distribution, but volatility expectations looking 3-6 months out (gold) were not nearly so historically unusual. That’s changed over the past several days, as expectations of volatility looking out months-ahead spiked. The bottom chart shows that they have risen to levels reminiscent of other generational events, including the GFC and its aftermath, the TMT bubble, and the Ruble/LTCM crisis.

S&P 500 Forward-Starting Implied Volatilities – Various Windows

Quick Take The Volatility Markets View on Crisis Duration

S&P 500 Implied Volatility – 3-6 Months Forward

Quick Take The Volatility Markets View on Crisis Duration Picture2 v2
Data through March 13, 2020. Top chart shows percentile ranks since January 1996 of 50-delta implied volatilities on the S&P 500 over several different forward-starting periods. Bottom chart shows S&P 500 implied volatilities from 3-6 months forward. Source: Acadian Asset Management LLC. Index Source: S&P 500 Index Source: S&P Copyright (c) 2020, Standard & Poor's Financial Services LLC. All rights reserved. For illustrative purposes only. The implied volatilities do not represent tradable levels.

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