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Global Equity Markets and Volatility

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The U.S. financial media have been focused almost exclusively on domestic politics over the last several weeks, but equity investors around the world have not been so myopic. The SPDR S&P 500 SPDR (SPY) languished from October into the year's end, but indexes on China (FXI) and Mexico (EWW) surged.


4Q 2012 International Equity ETF Returns
Source: Condor Options

While there are plenty of opportunities in U.S. stocks for 2013, volatility traders can find some even more interesting situations by broadening their scope. Global investing is not just about buying international ETFs or ADRs, or even trading foreign listed stocks. As implied volatility indexes on major exchanges and ETFs have become more widely available, there are more opportunities than ever for options traders. That's what we are going to discuss in next week's " Volatility World Tour" presentation.

As a starting point, we can look at the recent historical volatility of global equities, broken down into three large chunks: the U.S. (SPY), developed markets excluding North America (EFA), and Emerging Markets (EEM).

In the attached video, we show the three-month historical volatility of these ETFs since 2003. Most investors are aware that emerging market stocks tend to be more volatile, overall, than developed market large caps. However, this longer-term comparison shows two interesting developments. First, emerging market realized volatility has become much more correlated to SPY swings since the 2008 financial crisis.

Second, EEM has actually been less volatile in recent weeks than both SPY and EFA, and the three-month trailing estimates are all converging at about 14%. This is consistent with what we saw above in terms of asset returns, but it is historically very unusual. We will look into this in more detail shortly, including especially how option markets are pricing global stock volatility and which products offer the best edge right now.

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