Shhhh, It’s Quiet Out There

The Week Ahead

November 20, 2017

In equity markets, we’ve come to the point in the old western movie where our hero looks out over the horizon and warns that “it’s quiet out there…too quiet.” A run of low implied and realized volatility had some suggest that we’re somehow overdue for a big shakeout, not because valuations are high, but because it’s been such smooth sailing.

A recent NY Fed study put that theory to the test, and it comes up short. In general, realized equity market volatility is persistent and mean reverting, but there’s no tendency for a period of quietude to jump to a period of high volatility. Instead, when volatility is tame, the next month is more likely to also see below-average realized volatility, although over time a move back to the average is likely.

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