3 Volatility Charts to Watch for Signs of Contagion

Weighing the VIX against asset classes in China, Europe, and the commodities market

by Adam Warner

Published on Jul 8, 2015 at 9:27 AM
Updated on Jun 24, 2020 at 10:16 AM

I do think there's a growing sense that this Greek story is about to wrap up -- at least to the extent we obsess over it. I've said it before … and sure enough it rears its Grexit-y head back up again. But this time I feel confident. 

Why? Because China Fear has gotten more and more airplay. We need something that means Doom and Gloom for stocks, and this one fits the bill. The Shanghai Composite has lost one-third of its value (or something like that) in a few weeks. That has to spill over here, right?

Well, its still up big on the year -- and we're flat to down now, depending on where you look. So guessing it's not the Shanghai Crash that's spooking us. Rather, it's the Shanghai volatility. And that I can understand. I mean, we all know that volatility spills across asset classes … sometimes. 

With that in mind, I was thinking it's time to look at our CBOE Volatility Index (VIX) vs. the implied volatility of some other asset classes this year. We noted Europe vol yesterday, which as you would guess, has spiked a bit vs. VIX this year. 

How about China? Here's CBOE China ETF Volatility Index (VXFXI), which proxies volatility on iShares China Large-Cap ETF (FXI). Now, FXI doesn't swing quite like actual Chinese stocks, but it's somewhat of a proxy.

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And yes, you can make a case that the vol jump here "predicted" the recent VIX jump. The two moved in lockstep until a few months ago, at which point FXI vol exploded and VIX kept its head in the sand.

On the other hand, what good is a three-month lag? I could literally always point to a vol spike somewhere and say that's going to cause a vol spike here, and if you give me three months, it will prove correct almost every time. So scratch that. I'm going to say that, like pretty much everything, it doesn't matter until it does. We weren't too jittery in March and April and thus could ignore spiking China vol … but now, it's VolSpikeMageddon! 

Anyway, how about VIX vs. vol in the euro -- measured by the CBOE EuroCurrency Volatility Index (EVZ)?

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This pup spiked even earlier. And again, it predicted our recent spike so long as you gave it about four months.

It is interesting, actually, that euro implied vol hasn't really moved since January. It's not the sense I had watching the recent gyrations and/or euro implosions.

And finally, how about some oil? Here's VIX vs. the CBOE Crude Oil ETF Volatility Index (OVX).

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It's actually trailing the VIX! That makes some sense, seeing as we don't talk much about oil these days -- at least on a relative basis. We have to go all the way back to last fall, when imploding oil and spiking oil vol were predicting our doom. It also highlights the Convenience of Choosing Your Endpoints. If I graphed back to this time last year, you'd see a gigantic spike in oil vol vs. VIX, much like you see in VXFXI and EZV. OVX dragged VIX up a bit, but ultimately oil vol went back to "normal" and VIX has hovered in the teens all year.

It's very tough to prove or disprove volatility contagions. My basic theory is that markets have a mind of their own and we tend to backdate "causality" relationships as a way of explaining things that often defy easy explanation. There's almost always a vol pop somewhere, but our stock market doesn't always care about it. We do care now, so until this passes, we have to pay attention to Greece and China and whatever else comes our way next.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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