zerohedge.com / by Tyler Durden / Feb 16, 2017 12:03 PM
Last September, JPM’s Quant guru Marko Kolanovic forecasted a short-term increase of market volatility and equity outflows at a time when volatility was “unsustainably low”, and pointed to catalysts that would trigger de-risking by systematic investors. In a just released note, he warns that “a similar set-up is developing now, this time driven by extremely low levels of market correlations.”
First question: what has driven the recent collapse in vol?
The JPM quant answers that one of the main drivers of the recent collapse of volatility (and hence high leverage of systematic and fundamental investors) is the record decline in market correlations. Not just that the sector, stock, and country correlations are at all-time lows, but the recent change (drop) is the largest on record.
Next question: what has led to this decline in correlation, and a follow up: is this a sign of more calm, fundamentally driven markets ahead or just a temporary dislocation?
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