The era of sudden shocks - we don't have an explanation

A recent FT article by Robin Wigglesworth highlights the thought that we are in a period of sudden shocks or short bursts of uncertainty. While economic volatility has declined, as described by the Great Moderation, even with the Global Financial Crisis (GFC) and COVID-19, there have been short-term shocks in financial volatility. The current volatility, as measured by the VIX, is close to the long-term average. Still, the volatility of vol is elevated, and there are these periods of volatility shocks. 

Is there an explanation for this vol shock environment? There is no easy answer. It could be related to the higher leverage in the marketplace, but that does not explain the short-term nature of these shocks. It could be quick policy responses, but there have been more short-term spikes than Fed responses. It could be what a friend has referred to as the "wall of money" that will invest when there is a short-term reversal. That could be a reasonable explanation, yet it does not explain why we have the shocks in the first place. 

The investment implications for this are worth reviewing. Currently, it states that investors should not be concerned about these shocks, even if they are frequent. For some strategies, such as trend-following, it is a negative outcome where managers get whipsawed by these spikes. Trading strategies require more activity, not less.