History suggests volatility in global stocks will hang around for some time yet

Mark Kolbe/Getty Images

After years of calm, volatility returned to global stocks last week, especially in the United States.

The S&P 500 Volatility Index, or VIX, surged higher, rising above 50 at one point last Tuesday, one of the highest levels ever recorded.

That had an impact on stocks around the world, leading to a bout of selling rarely seen since the global financial crisis.

Source: Deutsche Bank

At 29.06, last week’s closing level for the VIX remained elevated, indicating that options traders think volatility will likely remain elevated in the month ahead.

And if history is any guide, it could be even longer, according to analysis from Jim Reid and Craig Nicol, strategists at Deutsche Bank.

“For all occasions where the VIX has climbed above 35 it has taken an average of 2593 calendar days to next trade below 10 and 832 days to next trade below 15,” the pair wrote in a note released late last week.

“We also split the data pre and post 2010 with the latter period seeing these numbers fall to an average of 2100 days and 210 days respectively.”

This table from Deutsche Bank shows the average and median time it has taken the VIX to fall to 10 and 15 when it has traded above 30, 35 and 40 respectively.

Source: Deutsche Bank

So while the time for VIX to fall back to 15 has, in the post-GFC era, shortened compared to what was seen before and during the GFC, history still points to the likelihood that volatility will remain above what was seen in recent years.

“This analysis does show that it usually takes some time to trade at low levels of volatility after a spike to historically elevated levels. The caveat would be that we have never seen a spike above 35 before from near record low levels of volatility. So this time is indeed different in that respect.”

Despite the unprecedented nature of the recent spike in volatility, Reid and Nicol say it’s unlikely that volatility will return to the levels seen in the second half of last year any time soon.

“Even if volatility falls notably from here which history says is likely after such a spike, we find it difficult to imagine the market being prepared to drive it down to the record low levels of [the second half of] 2017 anytime soon given the shock seen this week,” they say.

“Surely memories will stay fresh.

“This is important as it drives valuations in other products especially credit where historically spreads are very tied to volatility. This supports our view that by year end credit spreads will be wider than current levels which was predicated by our belief in higher inflation, yields and volatility in 2018.”

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.