A better way to measure volatility

By Suzanne Sharma | October 16, 2012 | Last updated on October 16, 2012
2 min read

Those that rely only on the VIX to measure volatility probably think we’re in for a smooth ride.

However, that index, which tracks daily stock market moves, shouldn’t be used in isolation, says Tyler Mordy, director of research and co-CIO of Hahn Investment Stewards.

Read: Clients hate volatility? Here’s help

“Daily volatility is one thing, but there are a lot of other measures,” he says.

These include volatility of opinion and human behaviour.

Read: When markets give you volatility, invest

“It’s humans who run stock markets,” says Mordy. “A lot of stock participants have been expecting an environment that approximates normal to return.”

But when that doesn’t happen, the VIX shoots up. He points to the last two years as an example.

“There was a widely-held belief we would enter [an escape velocity] — in other words a self sustaining recovery led by the private sector,” says Mordy. “When that didn’t materialize, we went into the slow-growth phase we’ve been used to in the last couple years, [and] the VIX spiked up.”

Read: Investment team revels in volatility

Mordy says measuring volatility of opinions and behaviour is a more tactical approach, which can be done using consumer confidence data, for instance.

And when it comes to market cycles, he calls the bullish 1980s and 1990s an aberration, as well as the period’s lower volatility and inflation variability. “To think that would continue is definitely a mistake.”

Read: Dealing with currency volatility

Mordy says we’ve been in a secular bear market since 2000. While it may sound scary, he says, it really is just a sideways market, which can last from 15 to 20 years.

“We think we’re entering the third [and final] phase of the secular bear market, which tends to be the most emotionally charged and hence the most volatile.”

Suzanne Sharma