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Chinese volatility index hits 31-month low

Chinese volatility index hits 31-month low

The AlphaShares Chinese Volatility Index hit a 31-month low of 23.48 on Christmas Eve and closed the year at 24.22, down from 59.69 at the start of 2009.

The data from AlphaShares also shows that the CBOE S&P 500 Volatility Index traded at its 52-week low of 19.47 on 24 December and finished the year at 21.68. It began the year at 40.00.

The CHIX premium over the VIX ended 2009 at just 11.72 per cent, after having started the year at 49.24 per cent.

Overall, both the CHIX and VUX moved down over the course of 2009, declining by 59.43 per cent and 45.80 per cent respectively. This compression in excessive risk premiums was the major macro trend in 2009, driving volatility indexes lower and equity indexes higher.

During the year, the S&P 500 Index increased 23.45 per cent, while the FTSE Xinhua Index climbed 45.27 per cent and the Hang Seng had its sixth best calendar performance since 1975, gaining 52.02 per cent.

Jonathan Masse, senior portfolio manager at AlphaShares, says the timing differences likely skewed the number on the last trading day of the year, as the S&P 500 sold off one per cent after the major global equity markets had closed in Europe and Asia. However, the CHIX-VIX premium averaged 28.27 per cent over December, still very low compared to historic levels.

“The major decrease in Chinese implied volatility relative to that of US volatility is probably due to options investors getting more comfortable with the risk premium in China relative to that of the US market,” says Masse. “While the US has taken on mountains of debt with many questions about the stimulus package backstopping its banks’ balance sheets, the USD586bn stimulus package in China is backed by a country with over USD2trn in reserves, and is having a real impact on the infrastructure of the country – roads, education, public works and real estate projects.”

China closed 2009 as the world’s third largest economy and as one of the globe’s most important sources of demand. Confidence in China’s economy was evidenced by the dramatic reduction of implied volatility in the options market relative both to the historic levels and to levels relating to other global volatility benchmarks.

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