Are Investors Not Worried about Risk Anymore?
The VIX continues to fall
The Chicago Board Options Exchange Volatility Index (or the VIX), for most of 2017, has been close to multi-decade lows. The VIX (VXX), popularly known as “the fear index,” measures markets’ perception of uncertainty. The value of this index is derived from the expected probabilities of large fluctuations in the underlying index, which are measured by S&P 500 demand. The VIX hit a low of 8.8 in July this year, witnessed occasional peaks due to US-North Korea tensions, and then quickly returned to lower levels.
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Are markets perpetually risk-on?
When volatility remains low, markets move into a risk-on phase, where investors move from safe-haven investments such as US Treasuries (GOVT) into riskier investment stocks (SPY), real estate (ITB), and corporate bonds (LQD), in search of higher yields. Global financial markets have remained in a risk-on mode despite many risks faced by the global economy. The cause of this irrational exuberance for riskier assets is difficult to pinpoint and is making seasoned investors anxious.
Throughout this series, we’ll look at potential risks facing markets, and how they could impact global financial markets in the short-to-medium term if they end up materializing. We’ll discuss equity markets’ high valuation, the lower yields in bond markets, and the current outlook for currency markets.