If the market is right, Goldman warns that current cross-asset-class volatility appears to be pricing in a lot of economic damage. As they note, VIX doesn’t just trade the economy; it also has a strong and often humbling element of risk sentiment baked in.
Goldman Sachs explains…
Mapping VIX levels back versus the economy … weaker data = higher VIX
Understanding the interplay between volatility and the economic cycle has been a core theme underlying our volatility framework. Although the VIX is often considered a ‘sentiment indicator’, a regression of average calendar month VIX levels on U. S. consumer spending, manufacturing and employment data explains 59% of the variability in VIX levels back to 2000. Updating our model to include last week’s ISM and employment data suggests that if the VIX were trading off the recent economic data then average VIX levels should be tracking at 18. The average VIX level in August was 19.4 and the average since mid-August has been 25.9, with a closing high of 40.7 on August 24.
Baseline VIX: ISM in low 50’s suggests equilibrium VIX level of 18, even after controlling for the drop in unemployment rate
This post was published at Zero Hedge on 09/08/2015.
Follow on Twitter
Recent Comments