There is a strong negative correlation between the S&P 500 and the VIX. This is also typically true of US stocks and Implied Volatility (IV). Is this also true for international equities? What is the correlation between international IV and the VIX?
A table of various ETFs and their CBOE Volatility tickers was displayed. The ETFs included were the SPY (S&P 500 ETF) VIX, EEM (Emerging Markets) VXEEM, EFA (Developed Economies ETF) VXEFA and FXI (China ETF) VXFXI. The table includes the average correlation and the percentage of days of negative correlation. While SPY, EFA and EEM had similar average negative correlations to their Volatility index, FXI had a weaker average negative correlation.
Next is a look at the correlation between the ETFs mentioned and their Volatility indices. Interestingly, FXI had a similar correlation to that of many commodities in which spikes in IV are associated with large rallies as well as large selloffs in FXI. James pointed out the hidden opportunities within China (FXI) in that high IV can be sold when it rallies hard as well as when it falls.
From there, tastylive analyzed global Volatility indices and the VIX. Overall, global equity IV is highly correlated with the VIX, reinforcing why global markets often experience market turbulence at the same time.
Tom added, “So many people think they are diversified because they are long the emerging markets or long China (against their long US portfolio). The reality is that you're not diversified especially in down moves.”
Watch this segment of Market Measures with Tom Sosnoff Tony Battista plus special guest James from the research team for the valuable takeaways and our research findings on the correlation between the international equities and their volatility levels and the VIX to those volatility levels.
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