Risk Latte - Hong Kong Volatility Index at record low!

Hong Kong Volatility Index at record low!

Team Latte
Feb 07, 2005

The equity volatility index for Hong Kong stocks as measured by calculating the index of volatility for the Hang Seng Index – HIXX™ - has reached a record low of 13.87.

HIXX™ is an equity volatility index on Hong Kong stocks developed by Risk Latte Company and it calculates the real time 30 day at the money implied volatility of a synthetic option on the Hang Seng index. So far we only have one year’s data from January 2004. The value of this index hit 13.87 on Friday – closing prices – which is the lowest since we started calculating the index.

It is now well established that we have entered a period of low volatility and opinions differ on how long this is going to last. Some experts are likening this to the early nineties when there was an era of low volatility and the stock market had a fairly stable upward march. We believe that this period of low volatility should last for another six to seven months. We have been talking about Asian volatilities reaching a turning point for quite some time now, though it seems that the bottom of the volatility curve is quite flat.

The historical volatility of Hang Seng Index has always oscillated between 20% and 40% during normal times (exceptions are stock market crashes, SAR, 1989, dot com bubble bursting, etc.). It is generally accepted that 20% historical volatility is a kind of a lower floor for the Hang Seng index. However, this time - for the last six to seven months - the implied volatilities have really moved down and our index, which is calculated from the implied volatilities of the Hang Seng index options, has moved far below the 20% floor.

Most Asian equity indices have reached a bottom and another curious phenomenon that has happened is that the volatility of most major Asian equity indices, as measured by Risk Latte’s proprietary volatility indices, have more or less converged with each other. This is an interesting phenomenon which may mean that all these major markets have become equally risky.

We believe that the volatility index of the Hang Seng HIXX™ should move up in the near future – six to seven months – and the underlying Hang Seng index should move down accordingly.

(These notes, articles and reports ("the Content") are prepared by the staff of Risk Latte Americas Inc., Hong Kong ("the Company") using various sources, such as books, articles, research papers, websites and conversation with experts; the Content is strictly not for sale or re-distribution. In all cases the Company either seeks explicit written and/or verbal permission from the source (third party) to disclose certain facts in the Content on an "as is" basis and/or make minor or substantial modifications to the facts or to clearly delineate the source of the facts so disclosed in the Content as well as all intellectual property associated with it. The Company does not own the intellectual property of any of the products, processes and/or ideas mentioned in the Content, unless stated explicitly, and the Content is strictly for educational purposes. The Company cannot and does not guarantee the authenticity and/or the veracity of the facts, figures and events mentioned in the Content and does not accept any responsibility for any facts, figurers and events mentioned in the Content.

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