The Low Volatility Puzzle: Is This Time Different?

David Lucca, Daniel Roberts and Peter Van Tassel

No 20171115, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: As stock market volatility hovers near all-time lows, some analysts are questioning whether investors are complacent, drawing an analogy to the lead-up to the financial crisis. But, is this time different? We follow up on our previous post by investigating the persistence of low volatility periods. Historically, realized stock market volatility is persistent and mean-reverting: low volatility today predicts slightly higher, but still low, volatility one month and one year from now. Moreover, as of mid-September, the market is pricing implied volatility of 19 percent in one to two years? time. This level contrasts with the pre-crisis period when the term structure of implied volatility was relatively flat, which suggests this time may indeed be different, at least as measured by market participants? pricing of risk.

Keywords: VIX; Low volatility; stock market (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2017-11-15
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