Friday, January 30, 2009

Addendum To SPX Long Volatility and SPX Levels: Realized Long Dated Vol vs SPX

The above is long dated realized volatility for SPX - 220 days of realized volatility which is about 1 year.

Clearly shows the tracking of long dated volatility, or risk, and the price level of SPX.

The realized volatility explosion is "persistent" or even prescient where in the end the SPX trading level over the long run will be in accord with the SPX volatility. Notice how the drop in long dated realized SPX preceded the bull move in SPX from 2003 to 2007. Given the effect of correlation in the index, the rise in SPX volatility is more often coincidental - yet the obvious improvement in realized long dated SPX vol has to occur before a rally starts in a lag.

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