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Global Market Report - Volatility Regimes and the Drivers of Risk - April 2012

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Global Market Report - Volatility Regimes and the Drivers of Risk - April 2012

Apr 30, 2012

As measured by the VIX and VDAX, implied volatilities in both the US and Europe have fallen sharply since October 2011.  However, in the past ten years the declines in implied volatility have not been uniform: for example, when the dotcom bubble burst the VIX declined more rapidly than the VDAX.  During  the two most recent declines in volatility seen in 2009-2010 and 2011-2012, the US trended with global volatility while Europe decoupled from the global trend as it moved into the sovereign debt crisis in the Eurozone.  Portfolio managers who understand the source of changing risk can better rebalance their portfolios.  Through the lens of the Barra Global Equity Model (GEM3), we examine the relationship between implied volatilities and forecast volatilities to identify drivers of changing risk.
 


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  • Rachael Smith
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