This is what it looks like when expected volatility plummets:
Gold is up a good deal too, but mostly the world proceeds as if not so much has happened. Emerging market currencies reacted strongly.
VIX and the Fed rate hike
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Unless something has just happened in the last 5 minutes, gold is up today.
thanks, my bad, fixed…
Gold was up $14 or $15 earlier. Now, it’s up $9. It’s still up simply not as much. Silver also tracking that way, $14.13 was close to $14.30.
Oil still is down $1.69 to $35.66. Dow up 256 pts, or 1.45%. Gold often goes opposite Dow.
Chicken wings are up in anticipation of the New Year,
And pork bellies are trading lower in active trading.
This is your spurious economics report of the day.
Irving Fischer’s most memorable contribution to his field was the lesson that economists should not discuss markets.
To me, this was like going to the dentist. We know what is going to happen in advance, but the anxiety is gone once the appointment is over. In a few days, we will have forgotten all about it and begin focusing on the next anxiety inducing group of events!
Efficient market hypothesis doesn’t hold when the informational adversary has a theory of mind. This can shown with the work on zero-determinant strategies in Dyson 2012. The Fed can engage in a strategy that results in consistently positive abnormal returns on announcement days. And in fact that’s what a historical examination of the data finds. I think because most Fed chairs want to be viewed positively by the markets to some extent they consciously do engage in these strategies.
Sort of… At 1:30pm, VIX included a bunch of expected volatility around the Fed announcement, plus a bunch of regular volatility. At 2:30pm, most of the event volatility had passed, so even if expected regular volatility had not changed, the VIX would be lower, all else being equal.
You could look at VIX futures, which will tell you what implied volatility is expected to be on some future date, to see whether expected future volatility has really changed. And indeed, UXF6/UXG6/etc. (Jan/Feb/etc VIX futures) did sell off in the afternoon, so you’re correct, but the magnitude of the change isn’t as large as the VIX move.
VIX futures prices have very little predictive correlation to what the VIX index will be one future dates. VIX futures are first and foremost are highly levered inverse bet on S&P returns. The relative price me between expires tells you more about equity market risk premium than future vol expectations.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1270525
This is why we need VIX futures futures, so we can hedge VIX futures. To some this might suggest we also need VIX futures futures futures, but of course that would be ridiculous.
I know this post is tongue in-cheek. But I can’t help pointing out that a “futures futures” is simply a longer-dated future. I.e. if you want to bet on what the 3 month futures price will be in 6 months, you can simply by the 9-month future today and hold it until then.
Just to expand on this point: VIX is just a measure of the expected return on the market. As proven by Ian Martin from LSE, the SVIX (an equally weighted weighted basket of options vs VIX that has weights negatively proportional to the square of the option strike price, hence loading a lot on OTM puts) just measures the expected return perceived by a log-investor. Even without considering a log-investor, SVIX is a lower bound for the expected return on the S&P.
http://personal.lse.ac.uk/martiniw/WIER%20latest.pdf
Since gold was up somewhat significantly following the hike even though futures markets predicted that there was a 85-90% possibility of a rate hike, does that mean, had the Fed not hiked, there would have been a massive plunge in gold prices?
Some analysts opined that stocks would precipitously decline. I think gold may have risen more. What I think little matters.
Well my point is that it was almost guaranteed that the fed was going to raise rates, so any price shocks coming as a result of the hike are curious.
If the CEO of a company announced 30 minutes before his company’s earnings came out that there was a 90% possibility that earnings were going to be XYZ, and then 30 minutes later the company announced earnings of XYZ, a sudden shock in the price would be extremely strange.
@T Shaw: this is correct, the markets would have freaked out if they didn’t raise after all but insisting they would. The reaction today was exactly what you’d expect to an event so telegraphed.
Josh Brown was funny in a “Welcome To The Other Side” post:
The overnight borrowing rate against which the entire economy keys off of has now risen from “around zero” to “basically zero.”
Anyone know an easy way to see the immediate reaction of the TIPS Spread to the rate hike? Would be interesting to look at but having a hard time finding intra-day price movements.
Here’s a rule of thumb that most people miss when talking about the VIX. For every percentage point move in the S&P, the VIX moves eight percentage points in the opposite direction. This is well known due to the leverage effect of volatility, and is already priced into the implied vol surface.
On a day like today, when the market rose 1.5% percent, its expected for VIX to fall 12%. Since it actually fell 14.75%, that tells us that e far bigger news of the day was rising stock prices, rather than unexpectedly falling volatility.
Commercial real estate prices in the U.S. is reaching bubble levels in many markets, much of of attributable to capital inflows. What will the rise in interest rates to do this bubble? Who you gonna call? Ghost busters!
To be fair, I don’t think this really matters much now. I trade mainly with keeping strict money management; it helps me perform well and allows me to get success. At the moment I am working with OctaFX broker and they got 50% bonus on deposit, it is really cool given it is use able, so that’s why I like it so much since it obviously helps me with creating better plans and allows me to get high level of success.
But real rates aren’t down. Up a few bps today, more than 0.15% this month, and 0.3%-0.5% up this year.
#cowensthirdlaw