20/8/20: All Markets are Now Monetized

 

While the economy burns, the stock markets are literally going bonkers. Here are the main implied volatility options:

Which are symmetric, in so far as they treat volatility as symmetrically-valued to the upside and downside. And here is another way of looking at the same concept via repricing speed, or the rate of change in actual P/E ratios of S&P500 over longer time horizons, in this case: 20 weeks running P/E ratios change:

Source of the chart is @longvieweconomics. What does the above show? We have S&P500 at an all-time high. S&P500's PE ratio (PER) is only slightly below the 2000 peak. And, we have the fastest rate of S&P over-valuation increase in history - full 85 percentage points trough to peak. Both, the fundamentals and the momentum of their deterioration are absolutely out of control. Of course, this is just the stocks. One must never mention the massive bubble blown up by the Fed in the bonds markets. 

The 20-weeks moving change in weekly yields for Aaa-rated bonds maxed out at historical high of -44.06% (remember, lower yields = higher prices) in the week of July 31st this year. Top three historically highest rates of change took place in the three weeks of July 24th-August 7 this year. Overall range of bonds repricing is in the range of 60 percentage points in the current cycle:

This is plain horrendous: there is nothing in the macro and micro fundamentals that can warrant these changes. Except for the expectation of continued monetary accommodation of the Wall Street into the infinitely long future. 

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.