Thanks for the encouragement! Here’s my take, best enjoyed with salt :)
It’s possible markets underestimated the chances of COVID-19 becoming the crisis it is today. But it’s also possible that they correctly estimated the chances at every step, and this time we got unlucky.
Looking at VIX back only 3 months takes you to mid-January—right at the start of the outbreak. Look back 6 months, and you’ll see that there is a marked increase in VIX starting around Jan. 23rd. Looking at the day-by-day cases, it’s right around Jan. 23-25th that you can see a market increase in the number of countries confirming new COVID-19 cases on a daily basis.
So my interpretation is that this jump in VIX represents the market’s probabilistic forecast that COVID-19 would turn into a major economic downturn. Investors were saying “Yikes, COVID-19 looks scary. But we’ve been through pandemics before and gotten them under control. Hopefully the same will happen here, but there’s a chance we won’t.”
It was around Feb. 21st that the crucial evidence of confirmed international community spread came in, leading to the VIXplosion after that date.
I still think the model I crafted gives some good guideposts for what to look for in terms of transmissibility: spreading via respiratory droplets, a peak of contagiousness coinciding with onset of symptoms, a fast increase in cases at the point of origin, and no widely available point-of-care rapid test. Together, these indicate a virus that spreads efficiently and is hard to screen for. If it’s deadly, too, then watch out!
But I don’t know how to evaluate whether or not the amount of S&P 500 30-day option volatility (which I understand is what VIX measures) during Jan. 23-Feb. 20 was too much or too little given the information we had. It seems clear there was some volatility—the markets didn’t ignore COVID-19 during that period.
Before, I believed my model can help users be smarter than the experts. Now, I believe it can help them approach being as smart as the experts. The key difference is that the former would help you beat the market. The latter only keeps you from losing your shirt!
Would also like to add that there was a significant knowledge gap in those early days in February, with data from China on both the scale of the outbreak, and circumstances, particularly difficult to interpret and extrapolate. Knowing what we know now, those early signs would have been enough, but at the time, it certainly seemed possible that it would be contained within China (very limited spread overseas that could be easily contained), or at least the mortality rate would be lower.
Thanks for the encouragement! Here’s my take, best enjoyed with salt :)
It’s possible markets underestimated the chances of COVID-19 becoming the crisis it is today. But it’s also possible that they correctly estimated the chances at every step, and this time we got unlucky.
Looking at VIX back only 3 months takes you to mid-January—right at the start of the outbreak. Look back 6 months, and you’ll see that there is a marked increase in VIX starting around Jan. 23rd. Looking at the day-by-day cases, it’s right around Jan. 23-25th that you can see a market increase in the number of countries confirming new COVID-19 cases on a daily basis.
So my interpretation is that this jump in VIX represents the market’s probabilistic forecast that COVID-19 would turn into a major economic downturn. Investors were saying “Yikes, COVID-19 looks scary. But we’ve been through pandemics before and gotten them under control. Hopefully the same will happen here, but there’s a chance we won’t.”
It was around Feb. 21st that the crucial evidence of confirmed international community spread came in, leading to the VIXplosion after that date.
I still think the model I crafted gives some good guideposts for what to look for in terms of transmissibility: spreading via respiratory droplets, a peak of contagiousness coinciding with onset of symptoms, a fast increase in cases at the point of origin, and no widely available point-of-care rapid test. Together, these indicate a virus that spreads efficiently and is hard to screen for. If it’s deadly, too, then watch out!
But I don’t know how to evaluate whether or not the amount of S&P 500 30-day option volatility (which I understand is what VIX measures) during Jan. 23-Feb. 20 was too much or too little given the information we had. It seems clear there was some volatility—the markets didn’t ignore COVID-19 during that period.
Before, I believed my model can help users be smarter than the experts. Now, I believe it can help them approach being as smart as the experts. The key difference is that the former would help you beat the market. The latter only keeps you from losing your shirt!
Would also like to add that there was a significant knowledge gap in those early days in February, with data from China on both the scale of the outbreak, and circumstances, particularly difficult to interpret and extrapolate. Knowing what we know now, those early signs would have been enough, but at the time, it certainly seemed possible that it would be contained within China (very limited spread overseas that could be easily contained), or at least the mortality rate would be lower.