I am the one who knocks


Volatility Has A Message For You…

in Equities/Volatility by

Much has been made of late about the purported “death of volatility.”

We think reports of its demised are exaggerated. Vol is being held down by central banks and central banks alone. It’s like one of those sun tents you see on the beach that’s just dying to fly off the ropes like a kite, but which is anchored by metal spikes while overweight beachgoers drink beer in the shade. But volatility will be back and when it returns, you need to be aware of something RBC said this morning:

The Central Bank volatility suppression then too has created massive convexity in the system—as yield has become so difficult to find across asset classes (read: financial repression), shorting front-month volatility has become a popular source of alpha.  This is clearly exhibited by the tremendous scale of VIX ETNs which allow “vol tourists” easy-access to a vehicle to piggyback said recently winning strategy of “shorting vol.”

That echoes comments made by JPMorgan during last year’s bund VaR shock. To wit:

“What is causing VaR shocks and why are they happening often? We argued before that one of the unintended consequences of QE is a higher frequency of volatility episodes or VaR shocks: investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This, we note, is how QE increases the likelihood of VaR shocks.”

Indeed. And the proliferation of systematic strats is only adding to the “problem.”

But before you think the Brainards of the world will be able to suppress this in perpetuity, consider the following historical volatility chart from Deutsche Bank:


(Chart: Deutsche Bank)

In other words, vol has a stark message for you:



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