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AmextaFinance > News > Market Insights From Implied Volatility
News

Market Insights From Implied Volatility

News Room
Last updated: 2023/05/12 at 1:08 AM
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By Kostas Deslis

Implied volatility can be a useful indicator in making informed investment decisions and points to some turbulence from here.

Implied volatility measures market participants’ expectations of how much an asset’s price will fluctuate over a given period. According to a 2006 study by the Chicago Board Options Exchange (CBOE), implied volatility is a better predictor of future realized volatility than historical volatility, which is based on past price movements. This suggests that market participants’ expectations, as reflected in implied volatility, maybe a more accurate reflection of future price movements than past price movements.

Where do we stand now? In the current market, after volatility normalized at the beginning of the year, a huge pick-up in cross-asset volatility occurred in March, led by a sharp increase in interest rate volatility. Most interestingly, the U.S. front-end – as measured by expected one-year volatility on short-term interest rates – reached extremes of more than 300 basis points, implying a huge dispersion of potential outcomes over the coming 12 months. In relative terms, implied volatility for stocks as measured by the CBOE Volatility Index (VIX) remains subdued, standing at an average of 19% since the beginning of 2021. Compared to low-volatility regimes in cross-asset markets, such as in 2017 – 2019 (with an average VIX level of 15%), this is just 25% higher. Conversely, the Merrill Lynch Open Volatility Estimate (MOVE) index, which measures interest rate volatility, is 50% higher at an average of 100bps versus annualized volatility of 66bps in low-volatility eras.

When it comes to short-term moves, currencies have the most liquid short-dated volatility market. U.S. dollar/Japanese yen volatility has been one of the most observed and traded assets this year, and its term structure still suggests an elevated front-end risk premium, with current one-month to three-month volatility higher than one standard deviation relative to the five-year average, suggesting currency as well as rates volatility, as the dollar/yen is highly correlated to both global and U.S. rates, and expected to remain high.

It’s important to remember that periods of high implied volatility are often associated with market downturns, while periods of low implied volatility are often associated with market upturns. When implied volatility is high, it indicates that the market is pricing in a higher degree of uncertainty or risk, which can lead to sharp moves. Overall, we expect to see continued bouts of short-term volatility, throughout the year, across various markets, as the options markets seem to imply.

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting, or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice, or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness, or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees, and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections, and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

© 2009-2023 Neuberger Berman Group LLC. All rights reserved.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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News Room May 12, 2023 May 12, 2023
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