Wednesday, January 11, 2006

Vol: Reminiscence of a New Economy?

Adam just posted some views on vol and while I love the guy to death I just can't agree. When I start seeing articles on "new this", "it's permanently different now", etc., I also start remembering habitual rhetoric on "New Economy" back in 1999.

Now, could vol really have structurally changed so much that we aren't lilkely to see significantly higher levels (for longer than a few days that is)? Anything is possible - after all, the market is the least rational environment that I've witnessed in my life. However, saying that vol is going to be always low is almost equivalent to saying that the market will never crash.

The market will crash. I think we can all agree on that.

If so, we can also agree that post-crash vol remains high for quite a while - in both relative and absolute terms. There are other reasons why vol can rise but this example is just the most obvious one.

My view: The vol will rise. We just need an event which has been absent for quite some time. At the same time I don't recommend trying to game the big move - one thing I totally agree with Adam on is that relative VIX values are far more important than absolute ones. So, if you see VIX at 13, that in itself will be meaningful.



At 1:18 AM, Anonymous Anonymous said...

Could be that differences in the world economy or a new financial practice has altered something permanently, but it would be years before anyone knew for sure.

Of course, if you look at things relatively over absolutely it likely won't matter if the current situation is temporary or not.

Keep up the effort.



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