The current low level of volatility in financial markets, following a brief rise in July from geopolitical tensions, is partly due to reduced uncertainty about the global economy, according to the Bank for International Settlements (BIS).
In its latest quarterly review, Swiss-based BIS examined the prolonged calm in financial markets with volatility of bonds, equities, exchange rates and commodity prices well below historical averages in early July and in several cases even below pre-crises levels.
After a short-lived pickup in volatility in late July and early August, volatility as measured by the VIX volatility index had already dropped back to 12 percent as investor appetite recovered.
"Volatility is generally lower during business cycle expansions than in recessions, when uncertainty about macroeconomic and firm-specific fundamentals tend to be higher," BIS wrote.
Exceptionally accommodative monetary policy is likely to have played a role in driving volatility to such exceptional lows, by directly compressing volatility on fixed income markets.
"More transparent central bank communication, forward guidance and asset purchases have also removed uncertainty about interest rate changes for medium- and longer-term maturities," BIS adds.
Please click on www.bis.org to read the BIS September quarterly review.