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Stock markets – low volatility is cause for concern News

Saturday, August 19th, 2017 | Economy

Investors and policy-makers who are worried about the historically low volatility of the stock last year may have a good reason for this: most market failures have just preceded this pattern.
A study of 40 bubbles in the financial markets conducted by researchers around Didier Sornette at the ETH Zurich concluded that in about two-thirds of the cases the crashes followed a period of lower volatility – the "doldrums before the storm ". The study does not reveal the current market level.
"Our main finding is that volatility is neither a reliable indicator of the maturation of a bladder nor of the impact of a crash," wrote Sornette and his colleagues in a study published in July. This, in turn, "cast doubt on the alleged general relationship between risk and return," they conclude.
What the story says
The CBOE Volatility Index, known as the VIX, is on the record track, in the form of the smallest daily fluctuations since 2009, even after the rise last week due to the tensions in North Korea. Given the lack of "pullbacks" in other equity indices around the world, "we've never seen anything like it," says Ryan Detrick, a strategist at the LPL Financial broker in Charlotte, North Carolina, in a note last month.
The study by Sornette and his team suggests that a keen eye on metrics like the VIX little helps in monitoring possible upcoming asset price slumps. The group found no systematic evidence that an increasing volatility could be used as an early warning signal, that a bladder is present or is developing.
"Sometimes volatility tends to rise but often falls before the crash and most of the time volatility does not change as the bubble tends to end," they say.
Blow final
Other researchers have associated high volatility with bubbles. For example, in 2015, Harold Vogel and Richard Werner suggested in the International Financial Analysis Report that an increase in implied volatility is a bubble or a crash. More recently, some analysts have expressed concerns about the current low levels of US stock volatility, as Dhaval Joshi, an investment strategist at BCA Research, who sees a "ticking bomb".
The investigations carried out by the Swiss team took place between 1929 and 2011, including the US dotcom bubble in March 2000, the 2010 sugar bubble, stock bubbles in Europe, Asia and South America, and the US stock market bubbles of 1929 and 2007.
Very low volatility was seen at the apex of eleven blisters, including blisters in the US in 1962 and Hong Kong in 1987. The researchers write: "These are instances where investors were deaf, dumb and blind to the risk of the impending crash and investors Focus solely on taking the bubble to achieve a short-term gain during the sharp rise in prices ".
(Bloomberg)

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