Monday, December 24, 2007

Was 2007 the Beginning of a New Era in Volatility?

From the chart below, it certainly looks as if 2007 was the beginning of a new volatility macro cycle. It also looks as if the rate of change in volatility over the course of 2007 is unsustainable going forward – or at least inconsistent with the slope of volatility macro cycles during previous cycles. I am not going to make a specific long-term volatility forecast for 2008, but it would not surprise me if volatility flattened out in the low to mid-20s range in much the same manner that it did from late 1998 to early 2002.

While VIX macro cycles are somewhat dependent upon a subjective determination about the beginning and ending dates for each cycle, it should be noted that these cycles tend to last a minimum of two years, suggesting that the current rise in volatility should persist through all of 2008, even if the rate of rise in volatility begins to slow.

The evolution of the current macro cycle will undoubtedly be a big story to watch in 2008; VIX and More has a front row seat to watch the action and provide the play-by-play and color commentary as appropriate.

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