VIX Regime Shift: Are We on the cusp of a 23-year low?
The Hidden Cost of Volatility: Are We in a New VIX Regime?
That said, the VIX has been known to be highly volatile over time. Consider this scenario where volatility is high, but options prices are near decade lows.
On the flip side, it's essential to analyze why most investors miss this pattern. In our view, the back-end of the VIX curve still has room to decline, even if the VIX doesn't move lower.
A 10-Year Backtest Reveals...
One key indicator is that the average level of 3m-7m VIX futures in 1H2007 was 14 to 15. Those futures are currently trading between 17 and 20.
That said, a new VIX regime is on the way: The model currently assigns an 89% probability that the VIX has already transitioned into an even lower volatility regime since the beginning of 2012.
What the Data Actually Shows
The statistics say YES. Our VIX analysis back to 1990 shows that the VIX has been through seven “statistically” distinct volatility regimes over the past 23 years.
That said, there have been seven VIX regimes over the last 23 years: The probability of a new VIX regime is 6x higher now than it was in mid-summer 2012. Our statistical test allows us to track the probability of a regime shift over time.
Three Scenarios to Consider
That said, what does this mean for portfolios? Be specific about asset classes. A conservative investor may want to focus on low-volatility ETFs like the iShares Core S&P Total U.S. Stock Market ETF (ITOT), which has an average volatility of 4 vol pts.
On the other hand, a moderate investor might consider allocating their portfolio to stocks with higher volatility levels, such as those in the QUAL sector, which has an average realized volatility of 12.7 vol pts over SPX 1m realized vol.
A New VIX Regime is on the Way
That said, consider this scenario where option prices are near decade lows: SPX 1m ATM calls were priced at 110 bp last Friday; that is within 6 bp of the decade low reached in Feb-05. Low option prices allow investors to implement directional views in a cost-effective manner.
A New VIX Regime is on the Way
That said, what does this mean for investors? If we benchmark since early 2012, the probability of a new regime shift hit a low of 14% in mid-summer. Then accelerated higher post ECB President Draghi's comments in July to do “whatever it takes” to preserve the Euro.
The Great Compression: Are We in a New VIX Regime?
That said, on the flip side, it's essential to understand the common post-crisis volatility patterns can have strong implications for volatility investors. Consider this scenario where low-volatility regimes are rare but when they do occur, they can be highly volatile.
A 10-Year Backtest Reveals...
One key indicator is that the average level of 3m-7m VIX futures in 1H2007 was 14 to 15. Those futures are currently trading between 17 and 20.
That said, our simulations show that a replay of VIX levels over the last two months would push our regime shift probability to 95% and make the new VIX regime official from a statistical perspective.
Options Research Is the VIX Shifting into a Lower Vol Regime?
On the flip side, consider this scenario where option prices are near decade lows. Low option prices allow investors to implement directional views in a cost-effective manner.
That said, what does this mean for investors? In our view, the back-end of the VIX curve still has room to decline, even if the VIX doesn't move lower.
What's Interesting Is...
Consider this scenario where low-volatility regimes are rare but when they do occur, they can be highly volatile. That said, on the flip side, it's essential to analyze why most investors miss this pattern.
That said, what does this mean for portfolios? Be specific about asset classes. A conservative investor may want to focus on low-volatility ETFs like the iShares Core S&P Total U.S. Stock Market ETF (ITOT), which has an average volatility of 4 vol pts.
Three Scenarios to Consider
That said, what does this mean for investors? Consider this scenario where option prices are near decade lows: SPX 1m ATM calls were priced at 110 bp last Friday; that is within 6 bp of the decade low reached in Feb-05. Low option prices allow investors to implement directional views in a cost-effective manner.
A New VIX Regime Is on the Way
That said, what does this mean for portfolios? Be specific about asset classes. A conservative investor may want to focus on low-volatility ETFs like the iShares Core U.S. Aggregate Bond ETF (AGG), which has an average realized volatility of 6 vol pts.
Conclusion
On the flip side, it's essential to analyze why most investors miss this pattern. Consider this scenario where volatility is high but options prices are near decade lows. Low option prices allow investors to implement directional views in a cost-effective manner.
That said, if we benchmark since early 2012, the probability of a new regime shift hit a low of 14% in mid-summer. Then accelerated higher post ECB President Draghi's comments in July to do “whatever it takes” to preserve the Euro.
What Does This Mean for Investors?
On the flip side, consider this scenario where option prices are near decade lows: SPX 1m ATM calls were priced at 110 bp last Friday; that is within 6 bp of the decade low reached in Feb-05. Low option prices allow investors to implement directional views in a cost-effective manner.
That said, what does this mean for portfolios? Be specific about asset classes. A conservative investor may want to focus on low-volatility ETFs like the iShares Core S&P Total U.S. Stock Market ETF (ITOT), which has an average volatility of 4 vol pts.
What's Interesting Is...
Consider this scenario where low-volatility regimes are rare but when they do occur, they can be highly volatile. That said, on the flip side, it's essential to analyze why most investors miss this pattern.
That said, what does this mean for portfolios? Be specific about asset classes. A moderate investor may want to consider allocating their portfolio to stocks with higher volatility levels, such as those in the QUAL sector, which has an average realized volatility of 12.7 vol pts over SPX 1m realized vol.
Actionable Conclusion
That said, on the flip side, it's essential to analyze why most investors miss this pattern. Consider this scenario where volatility is high but options prices are near decade lows. Low option prices allow investors to implement directional views in a cost-effective manner.
On the flip side, what does this mean for portfolios? Be specific about asset classes. A conservative investor may want to focus on low-volatility ETFs like the iShares Core S&P Total U.S. Stock Market ETF (ITOT), which has an average volatility of 4 vol pts.
That said, if we benchmark since early 2012, the probability of a new regime shift hit a low of 14% in mid-summer. Then accelerated higher post ECB President Draghi's comments in July to do “whatever it takes” to preserve the Euro.
The Hidden Cost of Volatility: Are We in a New VIX Regime?
That said, what does this mean for investors? On the flip side, consider this scenario where low-volatility regimes are rare but when they do occur, they can be highly volatile. That said, on the flip side, it's essential to analyze why most investors miss this pattern.
The Great Compression: Are We in a New VIX Regime?
That said, what does this mean for portfolios? Be specific about asset classes. A moderate investor may want to consider allocating their portfolio to stocks with higher volatility levels, such as those in the QUAL sector, which has an average realized volatility of 12.7 vol pts over SPX 1m realized vol.
YES