Brazilian Volatility in 2014

The chart below shows what volatility does leading up to an uncertain election in an emerging market. The CBOE Brazil ETF Volatility Index (VXEWZ – 34.21) looked more like a chart of implied volatility for a one product biotech stock in front of a do or die FDA announcement. What happened after the election was a bit unexpected, at least by the author of this blog. Post—election volatility has remained high regardless of the performance of the iShares MSCI Brazil Capped ETF (EWZ – 36.57). Initially it seemed that the market was less enthusiastic about the reelection of Dilma Rousseff than the majority of Brazilians who voted for her. Since then lower oil prices and a series of company specific issues at Petrobras (PBR – 7.30) have resulted in elevated risk perceptions with respect to Brazil.


The table below puts VXEWZ price action in perspective relative to the previous three years. Despite a move over 70.00 the average for VXEWZ was actually lower in 2014 than 2011. Relative to the other tradable volatility indexes VXEWZ was several points higher than the second most volatile market in 2014. Oil volatility, as measured by USO option pricing, averaged 23.05 in 2014. With elevated implied volatility and a consistent stream of bad news the Brazilian market may actually qualify under Baron Rothschild’s investment advice, “The time to buy is when there’s blood in the streets”