Friday, December 23, 2011

VIX vs. VDAX - partial risk "decoupling"

VDAX is the Deutsche Börse's (German stock exchange) equivalent of the VIX implied volatility index. Given the current conditions in Europe, it is worth comparing the two volatility indices over three "stress" periods.

1. VIX vs. VDAX in 2008-2009 - the indices were on top of each other.

"We don't have any subprime debt - so we we are in good shape" said an officer of Allied Irish Bank in mid 2008. "Oh s..t, we have lots of Dublin real-estate" said the same person a few months later when Irish banks were being bailed out. The point is that the US financial crisis quickly became the world's financial crisis and the indices were tracking one another.

"V1X" (orange) is the VDAX index (Bloomberg)

2. VIX vs. VDAX in 2010, early 2011. Two events that stand out are the first "Greek crisis" and the earthquake disaster in Japan. Both events were viewed as impacting risk similarly in the US and in Europe and the indices were again generally on top of each other. In fact during part of the "Greek crisis", US equities were viewed as somewhat riskier, with VIX slightly higher in the summer. For a short period in the winter with QE2 in full swing in the US, VIX was lower.

"V1X" (orange) is the VDAX index (Bloomberg)

3. This year as the crisis unfolded,  VDAX has been consistently higher then VIX.

"V1X" (orange) is the VDAX index (Bloomberg)
Even though the eurozone crisis is viewed as a global issue, the market is clearly now differentiating the risks inherent in the US vs. German equity markets. This is quite different from the two previous stress periods and could be viewed as a form of partial risk "decoupling" between the eurozone and the US.
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