25/4/18: 90 years of Volatility: VIX & S&P

A great chart from Goldman Sachs via @Schuldensuehner showing extreme events in markets volatility using overlay of VIX and realised volatility from 1928 on through March 2018:

For all risk / implied risk metrics wonks, this is cool.

28/4/17: The VUCA Markets

My regular column with the Cayman Financial Review covering the current development of the risk-uncertainty frameworks in the markets is now available here: http://www.caymanfinancialreview.com/2017/04/26/welcome-to-the-vuca-world/.

10/1/16: Crisis Contagion from Advanced Economies into BRIC

New paper available: Gurdgiev, Constantin and Trueick, Barry, Crisis Contagion from Advanced Economies into Bric: Not as Simple as in the Old Days (January 10, 2016). 

Forthcoming as Chapter 11 in Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery, edited by Constantin Gurdgiev, Liam Leonard & Alejandra Maria Gonzalez-Perez, Emerald, ASEJ, vol 18; ISBN: 978-1-78560-743-1. Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2713335.

Abstract:      

At the onset of the Global Financial Crisis in 2007-2008, majority of the analysts and policymakers have anticipated contagion from the markets volatility in the advanced economies (AEs) to the emerging markets (EMs). This chapter examines the volatility spillovers from the AEs’ equity markets (Japan, the U.S and Europe) to four key EMs, the BRIC (Brazil, Russia, India and China). The period under study, from 2000 through mid-2014, reflects a time of varying regimes in markets volatility, including the periods of dot.com bubble, the Global Financial Crisis and the European Sovereign Debt Crisis, the Great Recession and the start of the Russian-Ukrainian crisis. To estimate volatility cross-linkages between the advanced economies and BRIC, we use multivariate GARCH BEKK model across a number of specifications. We find that, the developed economies weighted return volatility did have a significant impact on volatility across all four of the BRIC economies returns. However, contrary to the consensus view, there was no evidence of volatility spillover from the individual AEs onto BRIC economies with the exception of a spillover from Europe to Brazil. The implied forward-looking expectations for markets volatility had a strong and significant spillover effect onto Brazil, Russia and China, and a weaker effect on India. The evidence on volatility spillovers from the advanced economies markets to emerging markets puts into question the traditional view of financial and economic systems sustainability in the presence of higher orders of integration of the global monetary and financial systems. Overall, data suggests that we are witnessing less than perfect integration between BRIC economies and advanced economies markets to-date.

7/3/2013: Are stocks more volatile in the long run?

A recent paper by Lubos Pastor and Robert F. Stambaugh, titled Are Stocks Really Less Volatile in the Long Run? (first published NBER Working Paper Series No. 14757; Cambridge: National Bureau of Economic Research, 2009.) and subsequently in the Journal of Finance (vol 67, number 2, April 2012, pages 431-477) looks at the annualized returns volatility to stocks returns - the central concern for investors and finance practitioners. 

The study uses predictive variance approach to the analysis of volatility and look at what happens to predictive variance as the investment horizon increases. Conditional variance is variance in returns conditioned on the set of information known to investors.The predictive variance is therefore the conditional variance, where conditioning information is taken at the time when investors make their assessment of the risks (volatility) and returns implied by an instrument. 

Now, it is commonly established that stock returns volatility per any given period falls over the longer periods, potentially due to mean reversion, as majority of the studies show or argue. But this only relates to volatility as measured concurrently - in other words unconditionally. Of course, investors face volatility as expected on the basis of conditioning variables, and this predictive variance, it turns out, actually is higher, not lower, over the long periods. The study shows that this reversal of the relationship between investment duration and volatility of returns holds even once we control for mean reversion. In other words, uncertainty about future expected returns is a core driver of higher long-horizon variance in stocks.