Friday, 22 February 2013

Spread Volatility 1 year EEM (ETF Emerging Markets) vs S&P500: Head or Tail?

"Looking back, I wince at the careless way I tossed out my opinions." - Luke Ford, Australian writer.

When one looks at the spread between the convergence between 1 year volatility level of EEM US (ETF MSCI Emerging Markets) with the S&P500 1 year volatility level, one can wonder if there is more to it - source Bloomberg:
-In white EEM ETF 1 year 100% Moneyness volatility
-In orange SPX (S&P500) 1 year 100% Moneyness volatility
-Bottom screen, absolute spread between both.

What could be the reasons behind the convergencen and, is it logical?

Two possible reasons:

Head: There is a logical convergence, we might even get an inversion going forward when one think about Emerging Markets' debt to GDP levels which are much lower. This could drive in the coming years the volatility for Emerging Markets to fall below the volatility of developed economies.

Tail: The US private sector's deleveraging is moving in the right direction, the S&P500 being the most liquid market in the world, the USA have a sound legal system versus Emerging Markets, which have more troublesome political systems, and not the same governance levels, meaning less liquidity and therefore a higher volatility level.

We thought these remarks from our good cross asset friend would make some interesting food for (macronomics) thoughts.

Stay tuned!

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