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.
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.
For adaptive definition of low vol, it might be interesting to see if one can use SD itself (like Bollinger bands) as criteria like delta between pair SDs within 0.5 BB. I plan to investigate that.ReplyDelete
Your graphs are pretty. I picked 2 new pointers on R Graphics - abline and xblocks. Thanks.