Submitted by Salil Mehta of Statistical Ideas
High-Risk Regime’s 6-Month Anniversary
We are more than 1/2 a year since the August stock market crash, sometimes known as China’s Black Monday. And in our “flipping volatility regimes” article last month, we argued that the risk regime was statistically higher and endured that way, after the August tumult then snapback. During this past 6 months, the volatility index has averaged ~20%. Nearly four percentage points greater than its average during the 6 months before that! Today the market’s volatility has dropped to a close below 15%, something seen only 10 times in the past 125 trading days (6 months).
As shown in grey on the chart below, these 10 trading days were mostly at the end of October, but a couple were in early December. So about 4-5 month ago, and we show the astonishing and marvelous performance in a prior article we stated that one would get if they had endured one of the volatility ETF/ETN products for this entire period, since the volatility was last at this sub-15% level.
We notice that despite volatility happening to be exactly where it was during these 10 low days from October 19, through December 4, the XIV (inverse risk and shown in blue) ETN has fallen 24% on average (and with a 4% standard deviation about that estimate depending on when in that period it was bought) if it were bought at any point during that 34-day period. This isn’t simply a matter of the product aggressively decaying, but rather real heightened changes in risk that we’ve noticed in stocks and bonds (but still bushwhacked Wall Street strategists).
If the VXX ETN (shown in red) was instead purchased at any point over this period, it would have instead averaged a rise of 5% (with a 5% standard deviation). From October 19, through December 14, the VIX averaged 16% (or 1 percentage point more than today). And despite this drop in VIX if one blindly bought VXX and shorted XIV (shown in yellow), at any point during this 34-day period , then today they would have enjoyed a typical profit of 40% (with a standard deviation of 13%). One would have a similar superb profit, as well, even if they rewound to the start of this high-risk regime precisely 6 months ago!
Запись High-Risk Regime’s 6-Month Anniversary впервые появилась crude-oil.top.