VXEEM is the CBOE EMERGING MARKETS ETF VOLATILITY Index. In English, it's the VIX of of the Emerging Markets. An incredible reversal and spot difference has opened up between the VXEEM and VIX that was brought to my attention by Doris Frankel of Reuters. I did some digging and there is something funky goin' on here. Let's take a look together.
First, let's start with the one-year VXEEM and VIX spot chart, below. The red line is the VXEEM and the yellow line is the VIX.
This graph has two parts.
(1) Check out the difference in the spot moves between VIX and VXEEM from one-year ago (7-9-2012) to 12-28-2012.
We can see in that time-frame the VIX climbed 26% while the VXEEM dropped 16%. That's a 42 percentage point difference in the two measures with the option market reflecting substantially elevated risk in the S&P 500 (the VIX) while substantially reduced risk in the emerging markets (VXEEM).
(2) Monday that one-year change shows the VIX down 18% with VXEEM up 5%, so a 23 percentage point difference in the totally opposite direction. Said differently, since 12-28-2012 to 7-8-2013, the VIX has dropped 35% and the VXEEM has risen 25%. An incredible 60 percentage point reversal.
So, as of right now, the option market reflects a substantial change in the paradigm between the US markets (S&P 500) and the emerging markets. The next question is, "well, has there been a paradigm shift? Have the emerging markets realized greater volatility than the US in that time frame?" The answer is... sort of...
Check out the one-year HV180™ charts for the VIX and VXEEM, below. The yellow line is the VIX HV180™ and the purple line is the VXEEM HV180™.
Quick Note: HV180™ is the historical (aka realized) movement in the spot price over the last 180 trading days -- or about nine-months.
The VIX (yellow line) shows much higher realized volatility than the VXEEM -- which is a little weird given that the VXEEM currently sits at 26.56% and the VIX sits at 14.41%. Then we see an abrupt rise in the VIX HV180™ (the yellow line goes up quickly) around April of this year while the VXEEM HV180™ (purple line) kind of sits still.
Most recently, the VXEEM HV180™ has popped while the VIX HV180™ has not. Perhaps the recent move in VXEEM realized volatility has created this paradigm shift -- i.e. making the merging markets look more risky than the S&P 500 on a relative annual comparison... But still, there's no doubting it -- the purple line is lower than the yellow line. Or, in option speak, the realized volatility of the VXEEM is lower than the realized volatility of the VIX.
So what?... Well, why are the spots showing such an abrupt reversal? What's going on in the emerging markets that is so different now?
For the record, VXEEM covers:
- BRAZIL
- CHILE
- CHINA
- COLOMBIA
- CZECH REPUBLIC
- EGYPT
- HUNGARY
- INDIA
- INDONESIA
- KOREA
- MALAYSIA
- MEXICO
- MOROCCO
- PERU
- PHILIPPINES
- POLAND
- RUSSIA
- SOUTH AFRICA
- TAIWAN
- THAILAND
- TURKEY
Per the MSCI website.
Keep an eye on this relationship -- for you vol traders (or portfolio diversifiers by region), a reversal of this magnitude is worth noting.
Disclosure: This is trade analysis, not a recommendation.
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