Category: Other

Calm before the storm? An analysis of the volatility markets

Source: Artemis Capital Management

The calm in volatility markets (realized and implied) since implementation of the recent wave of global stimulus has been nothing short of incredible.

The microstructure of daily VIX movement (defined as minute-by-minute vol-of-vol annualized) has fallen dramatically since implementation of the ECB’s LTRO program. Volatility-of-volatility microstructure is now calmer than at any point over the past six years of data.

The VIX index registered the lowest intra-day movement in history on January 11 with a daily high-low range of only 1.14%. The S&P 500 index has gained or lost only 0.46% a day in 2012 compared to 1.04% in 2011 representing the biggest reduction in eight decades going back to 1934 (shortly after Roosevelt devalued the dollar to end the Great Depression).

Volatility of VIX

Volatility markets are simultaneously calm on the surface and fearful underneath. Look at volatility one way and you see nothing but complacency with five year lows in the VIX index, but look at it from a slightly different angle you will see a furious bull market in fear. On August 17th the VIX index fell to the lowest level since the summer of 2007 generating significant media attention. Every time the VIX falls into the low-teens you get the same clichéd range of “volatility is cheap” and “now is a good time to hedge” sound bites from the financial media. Low spot-volatility does not mean cheap volatility. Volatility may be cosmetically low compared to historical averages but this ignores many important factors. For example, this past August it was more expensive to buy 1-year forward volatility with the VIX at 13.45 than it was one day after Lehman went bankrupt in September 2008 when the VIX was above 31. Think about that!

VIX futures curve

Intra-daily Statistical Range Distributions (1997 – 2000)

Period closing GMT 4-hourly hourly Period closing GMT
max 10% 20% 32% median 68% 80% 90% max 10% 20% 32% median 68% 80% 90%
All 921 106 79 64 50 38 32 25 537 53 40 32 24 18 15 11 All
0000 285 65 52 42 34 27 22 17 182 38 30 24 18 12 8 5 0000
0100 325 90 67 54 42 32 27 21 237 62 47 37 27 20 15 10 0100
0200 403 106 78 63 48 37 30 24 286 63 43 35 26 20 16 13 0200
0300 518 120 87 67 53 40 32 25 308 56 40 31 24 19 15 11 0300
0400 588 120 88 68 52 40 32 26 290 40 30 25 19 13 11 9 0400
0500 576 104 77 61 45 35 29 23 138 45 34 27 20 15 11 8 0500
0600 378 98 74 58 44 33 27 21 208 46 37 28 21 16 12 9 0600
0700 525 96 73 58 45 34 27 21 280 55 42 34 25 19 14 10 0700
0800 525 102 77 62 48 38 31 24 220 60 45 36 28 22 18 14 0800
0900 480 114 81 65 50 40 33 27 308 63 47 38 30 23 20 16 0900
1000 489 118 86 69 54 43 36 29 412 57 43 35 29 23 20 15 1000
1100 780 118 87 71 56 44 37 31 410 55 42 35 28 22 18 15 1100
1200 921 111 85 68 56 44 38 31 254 51 41 34 28 22 18 15 1200
1300 570 103 82 67 54 44 38 31 358 55 42 36 28 23 18 14 1300
1400 728 104 81 68 55 46 39 31 537 60 48 39 31 25 20 16 1400
1500 696 106 86 72 58 46 40 32 355 60 48 39 31 25 20 15 1500
1600 808 119 95 76 61 49 40 34 210 66 51 42 32 26 21 17 1600
1700 859 125 98 79 61 48 41 34 212 60 47 39 29 23 19 14 1700
1800 569 120 92 75 58 46 39 32 201 54 39 32 25 20 16 13 1800
1900 325 109 85 69 53 42 35 29 180 45 35 28 22 17 14 11 1900
2000 535 99 75 61 48 38 32 25 377 40 31 25 20 15 13 10 2000
2100 525 82 65 52 41 33 27 22 161 35 26 22 17 13 11 9 2100
2200 417 73 57 47 37 29 24 19 102 30 24 20 15 12 9 7 2200
2300 377 62 50 42 33 27 22 19 132 30 23 19 15 11 8 6 2300
max 10% 20% 32% median 68% 80% 90% max 10% 20% 32% median 68% 80% 90%
GBP/USD
Period closing GMT 4-hourly hourly Period closing GMT
max 10% 20% 32% median 68% 80% 90% max 10% 20% 32% median 68% 80% 90%
All 542 92 73 60 47 35 28 22 210 48 39 31 24 17 13 9 All
0000 542 55 43 37 30 25 21 16 47 23 17 14 10 7 5 4 0000
0100 542 56 45 37 30 23 20 17 115 30 23 19 14 11 8 6 0100
0200 542 57 44 37 30 24 20 17 89 29 23 19 15 12 9 7 0200
0300 200 55 43 36 29 24 20 17 180 28 22 18 14 11 9 7 0300
0400 200 53 42 36 28 23 20 16 72 22 17 14 11 9 7 5 0400
0500 183 51 41 34 27 22 19 15 105 26 20 16 12 9 7 5 0500
0600 180 51 40 34 27 22 18 15 108 28 21 17 13 10 7 5 0600
0700 213 54 44 37 30 24 21 17 75 38 31 26 20 15 11 7 0700
0800 239 68 57 48 39 32 27 22 145 51 43 36 30 23 19 14 0800
0900 150 85 70 60 48 40 34 28 142 57 46 39 32 26 22 18 0900
1000 256 98 80 70 57 47 41 34 190 60 48 41 33 27 23 20 1000
1100 379 105 88 74 62 51 45 39 149 57 46 40 32 27 24 20 1100
1200 355 106 89 76 63 53 45 39 183 51 43 37 31 26 22 19 1200
1300 333 107 90 76 62 52 46 39 210 56 45 39 32 26 23 19 1300
1400 312 106 89 75 62 53 46 39 146 60 47 41 34 29 24 20 1400
1500 288 106 88 76 63 53 46 39 199 59 48 41 34 28 24 20 1500
1600 295 110 93 80 66 55 48 41 148 62 52 44 36 30 25 22 1600
1700 272 112 95 83 69 57 49 42 184 62 51 44 36 29 25 21 1700
1800 249 114 95 82 67 55 48 42 167 55 44 37 31 25 21 17 1800
1900 284 109 90 76 62 52 45 39 172 47 39 32 26 21 17 14 1900
2000 283 97 78 67 57 47 41 35 154 42 35 29 23 18 15 12 2000
2100 283 82 66 57 48 39 34 29 190 34 29 24 20 15 12 10 2100
2200 279 68 58 50 41 34 29 24 121 30 25 21 17 13 10 7 2200
2300 281 59 50 43 36 29 25 20 160 25 20 17 13 9 7 5 2300
max 10% 20% 32% median 68% 80% 90% max 10% 20% 32% median 68% 80% 90%
EUR/USD
Period closing GMT 4-hourly hourly Period closing GMT
max 10% 20% 32% median 68% 80% 90% max 10% 20% 32% median 68% 80% 90%
All 408 76 59 48 37 28 23 18 325 39 30 25 19 14 11 8 All
0000 103 41 33 28 23 19 17 14 60 20 17 14 11 8 6 5 0000
0100 113 42 35 28 23 20 17 14 76 29 23 19 16 13 10 7 0100
0200 105 44 35 29 24 21 18 15 82 24 19 16 13 11 10 7 0200
0300 126 43 35 30 25 21 18 16 47 21 17 15 12 10 9 7 0300
0400 340 43 35 30 24 21 18 15 294 18 15 13 11 9 7 5 0400
0500 330 38 30 26 21 19 16 14 84 21 17 15 12 8 7 5 0500
0600 315 38 31 27 23 19 16 12 73 26 22 19 15 11 8 6 0600
0700 294 48 40 34 28 23 18 15 65 37 31 26 22 17 13 9 0700
0800 154 62 52 45 37 30 27 22 121 45 37 31 26 22 19 16 0800
0900 229 77 64 54 44 36 32 27 225 49 38 31 26 21 18 16 0900
1000 229 85 70 59 49 40 35 30 122 41 34 28 22 19 16 14 1000
1100 229 91 74 62 49 40 35 30 165 40 31 26 22 18 15 13 1100
1200 225 86 70 58 47 38 33 28 119 40 32 27 22 18 16 13 1200
1300 408 82 66 55 46 37 32 27 325 46 36 29 23 19 16 13 1300
1400 399 86 69 61 49 40 34 29 118 51 41 34 27 23 20 17 1400
1500 399 86 72 63 53 44 37 31 129 48 40 35 28 24 21 18 1500
1600 325 98 81 69 56 45 41 35 122 56 44 37 31 26 23 20 1600
1700 206 105 88 73 58 46 41 35 141 47 38 33 26 21 19 16 1700
1800 262 97 82 67 56 45 39 33 148 40 33 28 23 18 16 13 1800
1900 262 91 74 62 50 41 36 29 135 35 28 24 19 15 13 11 1900
2000 262 75 61 53 44 35 31 26 81 31 26 22 18 14 12 10 2000
2100 199 62 53 45 36 30 25 21 63 25 21 18 15 12 10 8 2100
2200 197 55 45 38 31 26 21 18 48 22 18 15 12 10 8 6 2200
2300 94 48 39 33 27 22 20 17 76 19 16 13 10 8 6 5 2300
max 10% 20% 32% median 68% 80% 90% max 10% 20% 32% median 68% 80% 90%
USD/CHF
Period closing GMT 4-hourly hourly Period closing GMT
max 10% 20% 32% median 68% 80% 90% max 10% 20% 32% median 68% 80% 90%
All 651 114 90 73 55 41 34 26 484 58 44 36 27 20 15 10 All
0000 282 63 52 43 34 27 24 20 103 30 23 19 14 10 6 3 0000
0100 198 65 51 42 35 28 23 20 133 38 30 25 19 14 10 7 0100
0200 198 65 52 44 35 29 25 20 154 35 28 24 18 14 11 8 0200
0300 171 67 53 45 36 30 25 21 121 32 26 22 17 14 10 8 0300
0400 492 67 53 44 36 30 25 20 423 29 22 19 14 10 8 5 0400
0500 475 64 50 42 33 27 23 20 169 30 23 20 15 11 8 5 0500
0600 446 65 50 41 33 27 23 20 125 37 30 24 18 13 10 6 0600
0700 423 70 57 47 38 31 25 21 108 51 41 33 26 20 15 10 0700
0800 299 90 71 62 50 41 34 27 194 65 52 44 36 29 24 17 0800
0900 306 112 92 74 60 50 42 34 247 71 55 46 37 30 26 22 0900
1000 306 125 102 86 68 57 50 40 219 65 50 44 35 29 26 22 1000
1100 338 130 106 89 72 60 52 43 338 59 46 40 33 27 25 20 1100
1200 338 129 103 86 70 57 49 42 176 57 46 40 32 26 23 19 1200
1300 651 119 97 83 66 54 47 41 484 62 50 40 33 27 23 20 1300
1400 642 125 101 86 69 57 50 42 213 74 59 49 40 32 27 22 1400
1500 633 132 106 90 74 61 53 44 192 73 62 51 42 34 29 24 1500
1600 484 144 117 100 82 67 57 46 209 84 66 55 45 37 32 27 1600
1700 427 158 128 105 85 71 60 51 225 75 60 50 40 33 30 25 1700
1800 506 153 124 103 84 70 60 50 235 66 52 42 34 28 23 20 1800
1900 497 144 117 97 79 64 54 45 208 54 42 35 29 23 19 16 1900
2000 421 123 99 85 69 55 47 39 129 48 40 32 25 20 17 13 2000
2100 337 106 83 71 58 45 39 32 141 39 31 26 19 15 13 10 2100
2200 307 86 69 58 47 38 31 25 75 32 25 20 16 12 10 6 2200
2300 282 78 61 51 40 31 27 23 105 29 21 18 13 10 7 5 2300
max 10% 20% 32% median 68% 80% 90% max 10% 20% 32% median 68% 80% 90%

*Analysis provided by Marshall Kerr

Closing Levels Analysis (1986 – 2001)

Statistical Effect of Closing Position in Daily Range on Direction of Following Day’s Close, USD Majors, Jan 1986-Apr 2001*
Position of Close Above/Below % of Daily Range Statistical Probability of Next Day’s Close Continuing Strength or Weakness
exactly at high or low 40%
within 10 pips of high or low 44%
> 95% of range 44%
within 90-95% of range 47%
> 90% 45%
within 85-90% 42%
> 85% 44%
within 80-85% 43%
> 80% 43%
within 75-80% 44%
> 75% 43%
within 70-75% 51%
> 70% 45%
within 65-70% 62%
> 65% 50%
within 60-65% 67%
> 60% 56%
within 55-60% 58%
> 55% 57%
within 50-55% 53%
> 50% 56%

*Analysis provided by Marshall Kerr