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Wednesday, February 28, 2007

We live in interesting times

Just when you thought financial markets had become boring, things got interesting again.
  • First, the Chinese market dropped 9% [picture]. That wouldn't, by itself, worry me so much. The stock market isn't that important to China's economy. It isn't a particularly well done stock market either, so I don't worry so much about the information content of this drop in prices. You might find this book review to be mildly interesting. William Pesek has a good column on Bloomberg, and this IHT story describes recent events.
  • The big news is that last night, while we were sleeping in Indian Standard Time, the S&P 500 dropped 3.47% [picture]. Menzie Chinn has a great blog post diagnosing what happened, Caroline Baum has a good column on Bloomberg about the US housing market, and this NYT story uses the R word. This one-day drop of 3.47% is a fairly big move for the S&P 500 which has a daily sigma of 1%. If I look at the post-1990 period, on 99% of the days, the one-day returns were milder than -2.6%. They seem to get three days in each four years, on average, with a move of worse than -3.47%, and the last four years have been unusually benign.
  • Most world indexes have also dropped [link]. I think this is mostly in response to the drop in the S&P 500 and its changed vol, and not so much in response to events in China.
  • For many months now, the volatility of the S&P 500, as forecasted by the index options market, has been slumbering at remarkably low levels. It has jumped back dramatically [picture], going from near 10% annualised vol on Tuesday to roughly 18% last night. I wrote about the eerie low volatility a few weeks ago, and many commentators have been worried about the extent to which assets are `priced to perfection'.
  • Turning to India, Business Standard has an excellent edit showing you the political context of this budget speech.
It's now 9:40 and at 11 the budget speech will start. This is, by itself, a big dose of vol for the Indian equity market. There could not have been a more dramatic setting for the speech. In the past few days, Nifty's been a bit volatile, so margin levels are already much higher than they were just ten days ago.

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