Volatility Across Asset Classes Scored

 

Many investors look at the VIX index as a proxy for market fear, yet there are several issues that limit its usefulness. Most important, it does not represent the risks in all market. It is an index of equity volatility. The VIX also has tendency to stay rangebound for long periods. 

To solve these problems, we look at the volatility of bonds through the MOVE index, and the JP Morgan currency volatility index. For each of these indices, we z-score the values to produce a rolling 60-day index. A positive number represent an increase in risk while a negative number represents a decrease in risk. To get a broader index of risk, we form a weighted average of stock, bond, and currency risk components using a 50%, 30%, and 20% weighting scheme. 

Of course this is not perfect. It does not incorporate global equity volatility and it may underrepresent the risk associated with bonds, nevertheless, we believe that this is an improvement over using a single asset classes without scoring. 

We find that the overall index shows significant changes through time and corresponds to periods of high market risk. It captures the Fed policy changes and uncertainty and the banking crisis over the last 18 months. We have looked at a longer history and find that it does a good job of tracking overall risk  events.