VXEEM, VIX - Complete Reversal and Paradigm Shift -- US vs Emerging Markets via Option Markets

VXEEM spot is quoting $26.56%, down small 7.7% on the day. The LIVEVOL® Pro Summary is below.



VXEEM is the CBOE EMERGING MARKETS ETF VOLATILITY Index. In English, it's the VIX of of the Emerging Markets. An incredible reversal and spot difference has opened up between the VXEEM and VIX that was brought to my attention by Doris Frankel of Reuters. I did some digging and there is some funky goin' on here. Let's take a look together.

First, let's start with the one-year VXEEM and VIX spot chart, below.  The red line is the VXEEM and the yellow line is the VIX.



This graph has two parts.
(1) Checkout the difference in the spot moves between VIX and VXEEM from one-year ago (7-9-2012) to 12-28-2012.
We can see in that time-frame the VIX climbed 26% while the VXEEM dropped 16%.  That's a 42 percentage point difference in the two measures with the option market reflecting substantially elevated risk in the S&P 500 (the VIX) while substantially reduced risk in the emerging markets (VXEEM).

(2) Yesterday that one-year change shows the VIX down 18% with VXEEM up 5%, so a 23 percentage point difference in the totally opposite direction.  Said differently, since 12-28-2012 to 7-8-2013, the VIX has dropped 35% and the VXEEM has risen 25%.  An incredible 60 percentage point reversal.

So, as of right now, the option market reflects a substantial change in the paradigm between the US markets (S&P 500) and the emerging markets.  The next question is, "well, has there been a paradigm shift?  Have the emerging markets realized greater volatility than the US in that time frame?"  The answer is... sort of...

Check out the one-year HV180™ charts for the VIX and VXEEM, below. The yellow line is the VIX HV180™ and the purple line is the VXEEM HV180™.



Quick Note: HV180™ is the historical (aka realized) movement in the spot price over the last 180 trading days -- or about nine-months.

The VIX (yellow line) shows much higher realized volatility than the VXEEM -- which is a little weird given that the VXEEM currently sits at 26.56% and the VIX sits at 14.41%.  Then we see an abrupt rise in the VIX HV180™ (the yellow line goes up quickly) around April of this year while the VXEEM HV180™ (purple line) kind of sits still.

Most recently, the VXEEM HV180™ has popped while the VIX HV180™ has not.  Perhaps the recent move in VXEEM realized volatility has created this paradigm shift -- i.e. making the merging markets look more risky than the S&P 500 on a relative annual comparison... But still, there's no doubting it -- the purple line is lower than the yellow line.  Or, in option speak, the realized volatility of the VXEEM is lower than the realized volatility of the VIX.

So what?... Well, why are the spots showing such an abrupt reversal?  What's going on in the emerging markets that is so different now?

For the record, VXEEM covers:
BRAZIL
CHILE
CHINA
COLOMBIA
CZECH REPUBLIC
EGYPT
HUNGARY
INDIA
INDONESIA
KOREA
MALAYSIA
MEXICO
MOROCCO
PERU
PHILIPPINES
POLAND
RUSSIA
SOUTH AFRICA
TAIWAN
THAILAND
TURKEY

Per the MSCI website.

Keep an eye on this relationship -- for you vol traders (or portfolio diversifiers by region), a reversal of this magnitude is worth noting.

This is trade analysis, not a recommendation.

Follow @OphirGottlieb

Tweet


Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.