The Strange Death of Volatility
Ask any trader to list the market conditions most conducive to making money, and you'll hear the word volatility. Swinging prices create profit (as well as loss) opportunities; when prices flat line, the trading seas are becalmed. Volatility, though, is disappearing, in stocks, bonds and currencies.
Average volatility for the S&P 500 stock index, as measured by the Chicago Board Options Exchange VIX index, is 14.67 this year. While that's near 2013's average level of 14.23, its down from 17.80 in 2012, 24.20 in 2011, and 31.48 in 2009:
The bond market is similarly comatose. This year's average value for Merrill Lynch'sMOVE indexof U.S. Treasury bond volatility is the lowest in at least five years:
And the same is true in currency markets, according to Deutsche Bank's Currency Volatility index:
What's going on? As central banks pump billions of dollars, euros, yen and pounds into the global economy, they are smothering the information content that market prices are supposed to deliver, and destroying the two-way market between buyers and sellers. Now, not only do traders know the value of nothing (as always), they also know the correct price of very little.
While stationary prices might seem desirable -- isn't price stability the current stated policy goal of almost every policy maker in the world? -- this artificial suppression risks backfiring, once central banks start to unwind their various economic stimulus programs.
So what killed volatility? To borrow a line from Cluedo, the board game known in North America as Clue, it was the central bank, in the trading room, with the quantitative easing tool.
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