Updated with data through March 20, 2014
March 20, 2014 [PDF]
The S&P 500 was down -30 basis points over the past two weeks. Options trading on the S&P 500 index was strong. The average CCAR bank price rose 260 basis points and the average insurance company price fell -70 basis points. Equity market related RNPD standard deviations (tail risks) generally rose and RNPD skews ticked lower (more negative). These measures do NOT incorporate stress test related information. We intend to follow up with separate analysis of RNPD CCAR reactions.
This time period DOES include market reaction to recent FOMC decisions and guidance. Our standard reports of RNPDs derived from inflation caps and floors show only small changes in the tails. In particular, the reports show the risk neutral probability of deflation changing very little.
We also looked more carefully at risk neutral probabilities in the middle of the distribution. Specifically, we examined changes in risk neutral probabilities at 1%, 2%, and 3% outcomes. The chart below presents the time series of risk neutral probabilities for these outcomes over the subsequent 2 years.
We point out the interesting changes from March 17th to March 19th. The risk neutral probability of a 1% inflation rate over the next two years rose 345 basis points while the probabilities of 2% and 3% inflation fell 120 and 277 basis points respectively. For more information on the methodology for making these estimations see Kitsul and Wright.1
Banks & Insurance Companies
Options trading was also relatively brisk for the insurance companies we follow. Volumes were about average in the broader CCAR universe of banks. RNPD standard deviations and skews were mixed.
Banks with above average and increasing trading volume were BK, KEY, and FITB. Insurance companies with above average and increasing trading volume were HIG, LNC, and MET.
Other Commodity Markets
With the exception of wheat, spot prices in the other commodity markets we follow generally fell over the past two weeks. Corn fell -1.8%, gold fell -1.6%, WTI crude fell -2.0%, and the real estate ETF fell -2.1%. The dollar was stronger. Options trading volumes were light. Consistent with the direction of spot prices, RNPD standard deviations rose slightly.
1 Kitsul, Yuriy and Jonathan H. Wright (2012): The Economics of Option-implied Inflation Probability Density Functions, NBER Working Paper 18195. We note that K-W have updated their methodology in the more recent version of the paper appearing the Journal of Financial Economics (2013).
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