Monday, January 3, 2011

S&P 500 Index 20-Day Historical Volatility Hits 39-Year Low

Since I haven’t seen it mentioned anywhere else, I thought I should note that 20-day historically volatility in the S&P 500 index hit its lowest level since April 1971, the same month that the Rolling Stones released Sticky Fingers and Charles Manson was sentenced to death.

Now there are multiple ways to calculate historical volatility. I outlined my preferred non-centered methodology in Calculating Centered and Non-Centered Historical Volatility, which yielded a 20-day HV of just 4.57 as of Friday’s close, barely 25% of the VIX’s closing value of 17.75 from the same day.

Of course, some of this disconnect is due to the holiday effect or calendar reversion, but given that we are seeing near-record lows in some volatility measures just two years and a couple of weeks removed from a VIX of 80+ should certainly raise some eyebrows.

In terms of implications going forward, today’s big(ger) move should herald the return of more normal volatility, as well as more middling implied and historical volatility measures.

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