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The Low Volatility Puzzle: Are Investors Complacent?

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Abstract

In recent months, some analysts and policymakers have raised concerns about the unusually low level of stock market volatility. For example, in the June Federal Open Market Committee (FOMC) minutes ?a few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.? In this post, we review this concern and find the evidence on investor complacency is mixed. On one hand, we present a view suggesting that historical volatility may have been abnormally high, rather than current volatility being abnormally low. On the other hand, we find that estimates of the volatility risk premium are somewhat low, which is consistent with the view that investor risk tolerance has increased. We extend this analysis in a related post publishing on Wednesday.

Suggested Citation

  • David O. Lucca & Daniel Roberts & Peter Van Tassel, 2017. "The Low Volatility Puzzle: Are Investors Complacent?," Liberty Street Economics 20171113, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87223
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    Keywords

    VIX; Low volatility; stock market;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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