Price volatility of S&P 500 rises to higher level than WTI crude oil

by Talk Business & Politics staff (staff2@talkbusiness.net) 64 views 

In early February, the stock market implied volatility exceeded the crude oil price volatility for the first time since 2008, according to the U.S. Energy Information Administration. The VIX measures the implied volatility or the expected range of short-term price changes on the Standard and Poor’s (S&P) 500 index options, and for four consecutive days in February, the VIX closed higher than the OVX, which measures implied volatility on crude oil options.

The OVX was established in 2007, and the VIX has closed higher than the OVX only four other times since then. All previous instances were in 2008, according to the EIA. The underlying commodity for the OVX is West Texas Intermediate (WTI) light, sweet crude oil, and it’s expected to have a higher volatility than an index that’s based on the value of 500 large capitalization stocks for a variety of U.S. companies.

In the financial downturn in late 2008, the VIX and OVX rose to their highest levels. The VIX was almost 90 in late October 2008, and the OVX rose past 100 in mid-December 2008. In early 2016, crude oil implied volatility jumped to 80 as crude oil inventories increased and economic growth in China was uncertain.

Since early February 2018, the VIX and OVX have fallen but are higher than they were at the start of 2018, according to the EIA. When the implied volatilities were high in early February, prices for the S&P 500 and WTI crude oil were decreasing. Since then, the prices have increased and are similar to the prices at the start of 2018.

Historically, crude oil and stock market prices have not been correlated, but several times in the past 10 years, they have changed in the same direction. The prices of WTI crude oil and the S&P 500 were not correlated between mid-2017 and January 2018, but as of March 9, they had a correlation of 0.38. A correlation of 1.0 would mean the price changes were completely correlated.

“The direct causes of increased correlations between oil prices and stock prices remain uncertain,” according to the EIA. “Both oil prices and stock prices could be responding to inflation data that may trigger monetary policy by the U.S. Federal Reserve.” As a contributing factor to inflation, average hourly earnings rose at the highest annual rate since 2009, before it was revised down in February.

Also possibly contributing to the higher volatility, trading volume increased for inverse VIX exchange-traded funds (ETF) and exchange-traded notes and direct selling of VIX futures contracts. An inverse VIX ETF offers short exposure to the VIX and is the same as selling a futures contract, according to the EIA. “When large numbers of holders sell inverse VIX ETFs, the underlying fund manager must purchase VIX futures, which could have contributed to an increase in the VIX. Significant increases in price volatility can also reflect high uncertainty about future economic growth.”

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