Despite the spike in volatility in the past week, it is premature to assume the low volatility environment has come to an end, according to Aberdeen Standard Investments.
Speaking in Sydney this week, Aberdeen Standard Investments chief economist Jeremy Lawson said that volatility – as measured by the CBOE Volatility Index (VIX) – is episodic in nature.
"Volatility is never at its long-term average. It's either a long way below that average, or it's a long way above it. So you oscillate between these periods of high volatility and low volatility," he said.
Even in periods of low volatility, there can be spikes that quickly die back down again, Mr Lawson said.
"That's a common feature of the environment, and there's nothing unusual about that," he said.
The VIX index reached a high of nearly 50 on Monday during the trading of US markets (it has only touched about 15 four times in the past year).
While the size of that movement was unusual, Mr Lawson said, the notion that there would be spikes in volatility was "widely discussed" in the lead-up to 2018.
"Maybe volatility will average higher than it did through 2017 – it's very difficult for it to average as low as that," he said.
"But the really dangerous increase in volatility, the persistent large shift – that I don't expect us to go through unless we're really mischaracterising the [macroeconomic] and policy environment," Mr Lawson said.
Central bankers would have to make a "severe policy error" for volatility to permanently remain at high levels, he said.
It is more likely that the spike in volatility was a clear-out of low volatility structured funds, Mr Lawson said.
Stimulate new ideas. Stimulate new thinking. Top up your CPD and hear from industry experts with InvestorDaily’s Knowledge Centre. Keep up to date with the latest trends and reforms, all while adding to your CPD. Explore the knowledge centre Knowledge Centre now.
Despite the Australian economy’s ongoing rapid recovery, an Australian equity head believes GDP growth will “fade” in 2022. ...