Low volatility: worrying trend or new normal?

June 2, 2014

Volatility in financial markets is low, and that concerns New York Fed president William Dudley. Reuters reported he said last week, ”I am nervous that people are taking too much comfort in this low-volatility period and as a consequence of that, taking bigger risks.”

For instance, Treasuries volatility is really, really low:

Treasuries volatility 6/2

As is equities:

Equities volatility 6/2

And foreign exchange:

FX volatility 6/2

The Fed is worried that stable prices are encouraging  investors to increase their borrowing and load up on risk, which could end poorly if the economy goes south. But what if this is simply the new normal? Izabella Kaminska has an interesting take:

We live in a world in which corporations as far afield as British Airways, Ocado and Google can anticipate your every wish before you’ve even signalled it.

This is not some cornucopian dream, but rather a reflection of how information technology is undermining the need for pricing because the allocation of goods is now so efficient that urgency, crowding and queuing — the very things that drive prices — have in some cases been eliminated entirely.

Should you really be surprised that volatility is dying?

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