Revisiting why realized and expected volatility are so low

An email from Alebron:

Might it be worth revisiting this, since it’s been 3 years?

Vol is low right now, lots of hand-wringing about it. Some possible factors:

– Shiller used to say the puzzle was that equity vol was so high (at least in the context of plausible DCF models). More money is now in the hands of “smart” market participants (certainly as a fraction of total trading volume this is true), and they overreact less to news.

– Stagnation/complacency. Or alternatively, all the action is in private firms (unicorns and the like). Firms only go/stay public if they are boring/stable.

– Consider a model where an industry has n firms, and some of them are mismanaged but investors don’t know which ones. Then any news about one of them reveals something about which are the good/bad ones. Suppose that the spread of (a) management consulting, (b) corporate regulation, and (c) efficiency due to information technology brings everyone towards the mean. Bad companies aren’t as bad as they used to be (they have access to competitors’ good ideas, Dodd-Frank/SOX/etc prevent egregious mis-management/mis-reporting, etc), and good ones aren’t as good (their good ideas leak out, they get saddled with unavoidable costs due to Dodd-Frank/SOX/etc). Thus, the value of news decreases, vol decreases.

– Trump of course. Pro-business, but more accurately pro-big-business, or pro-rent-seeking? I’m inclined to mostly dismiss this, since it’s not like vol cratered when he got elected. Vol has been pretty low for most of the last 5 years.”

– Does 1990s low-vol Japan have lessons?
Curious if you have other thoughts…

The excellent Samir Varma sends me this new article on VIX and volatility.  We all know there are models where volatility begets further volatility, if only because the initial big price moves make investors more wary, less willing to hold some positions, and more willing to bail out of others.  Perhaps we need a more in-depth study of how non-volatility begets further non-volatility.  When prices just aren’t moving by very much, maybe certain kinds of information get drained away, and it becomes harder to conclude that some position other than your status quo default position makes sense.


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