As global economic uncertainty rises, so should market volatility
The gap between an index of Economic Policy Uncertainty and the Chicago VIX, an index of market volatility, may be closed soon and the tight historical correlation between the two re-established by an increase in market volatility
Theresa May’s comeuppance in the UK elections is the latest in a series of political events that have increased economic uncertainty around the world. The gold standard in raising uncertainty, if it can be called that, is of course the shock election of Donald Trump as US President. The obvious question then is: shouldn’t the rise in uncertainty be mirrored in the financial markets?
The accompanying chart, taken from the World Bank’s Global Economic Prospects, shows the relationship between an index of Economic Policy Uncertainty (EPU) and the Chicago VIX, an index of volatility in the markets. As the chart shows, rises and falls in the VIX have closely tracked rises and falls in the EPU historically, until the Trump win. Paradoxically, the election of Donald Trump led to a fall in the Vix, or to lower market volatility.
It is very likely that the gap between the EPU and the VIX will be closed soon and the tight historical correlation between the two re-established by an increase in market volatility.
Says the World Bank report, “A further increase in policy uncertainty from already high levels could dampen confidence and investment and trigger financial market stress, after a period of unusually low financial market volatility. Market reassessment of advanced-economy monetary policy, or disorderly exchange rate developments, could contribute to swings in EMDE (Emerging Market and Developing Economies) asset prices and capital flows, potentially amplified by vulnerabilities in some countries.’
Editor's Picks »
- Chief technology officers of Reliance Jio, Bharti Airtel quit
- IIT-Bombay generates ₹17.99 crore revenue in 2017-18, highest among IITs
- EPFO payroll data shows 4.4 million jobs created in 9 months till May
- Dubai recipe for economic success looks stale as markets slump
- CWC meet: Rahul Gandhi says BJP attacks institutions, Dalits, and poor
- What ABB India’s performance in June quarter says about capex growth
- Bajaj Finance does well in Q1 even as competition hots up
- Kotak Mahindra Bank: The perils of being priced to perfection
- Higher cane price crushes hopes of sugar mills
- Market optimism before 2019 general election: History may not repeat itself