Volatility and Revolutions

Events in North Africa and the Middle East have me thinking a lot about volatility these days. By volatility I am referring not just to the CBOE S&P 500 Volatility Index (VIX), but also to measures of volatility across other asset classes as well.

I was not around to measure volatility during the Civil War and there were not the requisite stocks or options to make such measurements possible back then. Using historical stock price data, however, one can calculate realized (historical) volatility that occurred in the context of various historical events. Using a one month realized volatility calculation, I think it is instructive to note that during the October 1962 Cuban Missile Crisis, when the world was probably as close as it ever has been to nuclear war, realized volatility never made it above 20. Going back to December 1941 and Pearl Harbor, realized volatility was only slightly higher, topping out at about 23. 

Recall also the unusual action in the markets during the 1990-1991 Gulf War. Historically reconstructed VIX data show the VIX spiked over 36 on the day United Nations’ deadline for Iraq to withdraw from Kuwait expired. As soon as American military action commenced, the VIX began to fall, with the VIX dropping all the way to 24 in the space of a week.

Turning to the present, the events in Egypt will be almost impossible to spot on a chart of the VIX by the end of the year. The blip in equity volatility due to the Libyan revolution has been similarly muted so far. Investor anxiety is better seen on a chart of the CBOE Crude Oil Volatility Index, sometimes known as the Oil VIX (OVX), which measures implied volatility in USO, the popular crude oil ETF.

Going forward, investors will be best served by adopting a holistic approach to volatility and market sentiment, taking advantage of such measures as the VIX, Oil VIX, CBOE Gold Volatility Index (GVZ), CBOE EuroCurrency Volatility Index (EVZ) and other indicators that are able to take the pulse of investor sentiment across a broad spectrum of asset classes and are particularly sensitive to flight-to-safety trading. If history is to be any guide, however, geopolitical crises frequently fail to delivery market volatility that matches the extreme level of fear and anxiety being experienced by investors, diplomats and ordinary citizens.


(Bill Luby, VIX and More – VIXandMore.blogspot.com)