Emerging as Low Vol

Extending the series begun with When Russell 2000 is Low Vol, I thought I should take a look at Emerging Market stocks during periods of low relative volatility to the S&P 500.  So you can replicate even without access to expensive data, let’s use the Vanguard Emerging Market Fund (VEIEX) and the Vanguard S&P 500 Fund (VFINX) as proxies.  In the 12 month rolling regression, we see the same fairly steadily increasing beta and correlation of the Emerging Market stocks to the S&P 500 that we saw in the Russell 2000.

From TimelyPortfolio

If I progress further on this research, I will have to work on an adaptive definition of “low vol”, but for the purpose of this post, I defined “low vol” as

Emerging 50 day std. dev – S&P 500 50 day sd > –0.075

For the Russell 2000, we used a more strict 0.0125.  Although the numeric definition is different, the chart shows a very similar profile.

From TimelyPortfolio

R code from GIST:

	require(quantmod)
	require(PerformanceAnalytics)
	getSymbols("VEIEX",from = "1900-01-01") #use VEIEX Vanguard Emerging as proxy for emerging mkt stocks
	getSymbols("VFINX",from = "1900-01-01") #use VFINX Vanguard SP500 as proxy for SP500
	#get 1 day change for the emerging and sp500
	roc <- na.omit(merge(ROC(VEIEX[,6],type="discrete",n=1),ROC(VFINX[,6],type="discrete",n=1)))
	stdev <- rollapplyr(roc,FUN=sd,width=50)
	#get relative strength of emerging versus S&P 500
	rs <- VEIEX[,6]/VFINX[,6]
	#do some trial graphs to see the interaction
	plot.zoo(merge(stdev[,1]-stdev[,2],rs))
	plot.zoo(merge(stdev[,1]-stdev[,2]/rs,rs))
	plot.zoo(merge(stdev[,1]/stdev[,2],rs,VEIEX[,6]))
	#create a PerformanceAnalytics rolling summary of emerging versus the S&P 500
	charts.RollingRegression(roc[,1],roc[,2],width=250,main="")
	title(main="Vanguard Emerging compared to the Vanguard S&P 500 (Rolling 1 Year)",outer=TRUE, line=-1.5, adj=0.05, cex.main=0.85)
	#use colors provided in xblocks documentation
	rgb <- hcl(c(0, 0, 260), c = c(100, 0, 100), l = c(50, 90, 50), alpha = 0.2)
	plot.zoo(VEIEX[,6], #plot closing price of emerging
	bty="n", #no box; will fill in later with abline
	las=1, #no rotation on y axis labels
	xlab = NA,
	ylab = NA)
	xblocks(index(VEIEX[,6]), as.vector(stdev[,1]-stdev[,2]/rs > - 0.075),col = rgb[3]) #admittedly the -0.075 is ex-post
	#connect the axes
	abline(h=par("usr")[3]) #extend y axis
	abline(v=par("usr")[1]) #extend x axis
	abline(h=pretty(par("yaxp")),lty=1,lwd=2,col="white") #try something new for gridlines
	title(main="Vanguard Emerging VEIEX (source: Yahoo! Finance)",outer=TRUE, line=-2, adj=0.05)
	mtext("blocks denote periods where Emerging 50 day sd low compared to S&P 500 sd",side=3,adj=0.05,cex=0.7,font=3, line=-1.5)

view raw emerging as low vol when compared to sp500.r hosted with ❤ by GitHub