The same week they took on bears who warn low stock volatility is a recipe for high stock volatility, New York Federal Reserve staffers are back with a rebuttal for everyone who says the record-low VIX signals complacency.
“This time may indeed be different, at least as measured by market participants’ pricing of risk,” the researchers wrote Wednesday.
Looking at a VIX-like index with longer-dated options, the authors say the market is “pricing in implied volatility of around 19% in one or two years’ time. It follows that implied volatility is priced to rise rapidly,” they wrote.
Is it good or bad when people prepare for catastrophe?
While the point of the study is to pour truth serum on claims investors are in a state of dumbfounded bliss, the authors note that healthy anxiety doesn’t mean a correction is impossible.
“This is not to say that there are no risks or reasons for concern in the current environment,” the researchers wrote. They only suggest “there are differences in how market participants are pricing risk.”
Others say it’s not surprising when Fed staffers reach a happy conclusion.
“These guys are researchers so I don’t want to say anything that’s going to be critical of their research,” said Michael O’Rourke, chief market strategist at JonesTrading Institutional Services LLC. “They’re going to find the silver lining in something that might be alarming — it’s the nature of the economist to say ‘this is what I see but then on the other hand this could happen.’ That’s why people always criticize economists for being two handed.”