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Strategy Video: Volatility Underpricing FOMC Risk Suggests Explosive Markets Ahead

Strategy Video: Volatility Underpricing FOMC Risk Suggests Explosive Markets Ahead

2014-10-28 01:15:00
John Kicklighter, Chief Strategist
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Talking Points:

• Implied (expected) volatility traditionally builds into high profile events

• Volatility measures for equities and FX are surprisingly tepid heading into the Oct 30 FOMC meeting

• Considering risk trends have been unseated and market forecasts are so dovish, the market looks unprepared

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Heading into major event risk, we typically see expectations for volatility and the cost of hedges rise. Yet, as we close in on Wednesday's FOMC decision; we find the anticipation for market reaction is surprisingly stoic. Not only are activity levels generally higher now than they have been in past months; but the forecasts for the central bank's bearings have grown increasingly extreme towards the dovish view - at the same time the market grows increasingly aware of its dependency on temporary global stimulus. This disparity in impending event and the market's position reflects a similar type of mispricing to traditional scenario analysis. Yet, here, the result is greater volatility.

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