One possible reason for lower volatility could be that investors believe central banks will rescue them by injecting more money into the system if things go wrong—and that could be a risk
A number of analysts and commentators have expressed concerns over the relatively lower level of volatility in the global stock markets. They have argued that investors have become complacent and a possible reversion could negatively affect returns.
An analytical piece published by the Federal Reserve Bank of New York this week has raised some interesting points in this context. For instance, it highlights that it is not clear whether the long run mean of the volatility index (Chicago Board Options Exchange Volatility Index) itself is changing. Also, at current levels, it is difficult to pin down the time horizon when it could actually increase.
Clearly, financial markets have not fully understood the reasons and possible consequences of a lower than normal level of volatility. Lower volatility could itself result in a build-up of risks in the market. One possible reason for lower volatility could be that investors are beginning to believe that central banks will rescue them by injecting more money into the system if things go wrong—and that could be a risk.
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