US Elections and Stock Market Volatility
Will we witness stock market volatility around the US elections on 3rd November 2020?
Most likely, Yes. If we check the VIX Index published by CBOE, the index has recently increased. An increase in index means that volatility has increased. In general, an index number of more than 20% means the volatility is more than normal. If the index number is less than 20% and above 12% then we consider the market to be normal. If the index number is less than 12%, we consider the volatility to be low. In the last few weeks, the index has increased significantly and stayed above 20%. The following graph shows the last three months movement of the index.
As you can see, since around 24th Aug 2020, the index has increased to around 25% and stayed around that level.
If we were to consider the VIX Index for the last one year then we would find that the volatility has fallen in the last six months. However, this is for a different reason. The volatility in the markets had increased significantly due to Covid, but has been on a continous decline only to rise just in the last few weeks. The earlier spike during March 2020 is due to Covid, while the current increase is most likely due to the forthcoming US elections.
Note: We cannot be 100% sure that the increase is due to the elections as VIX Index does not tell you the reason. It only tells you whether the volatility has increased or decreased. It does not tell you the reason for the level or change. It is up to us to interpret it based on other available information in the market. Since, currently there are no other major events, we are presuming that the reason is the elections. There is a chance that we are wrong.
The below graph shows the VIX Index during the last one year.
Have we observed volatility during past US elections?
We cannot be sure. The following tables shows the past US election dates and the VIX index numbers during these dates.
||2nd November 2004
||4th November 2008
||6th November 2012
||8th November 2016
The following graphs shows the VIX index during the last four US presidential elections.
US Election of 2004
US Elections of 2008
During the 2008, we also had the Global Financial Crisis. We cannot say that the volatility is due to the US elections.
US Elections of 2012
US Elections of 2016
As we can see, except for 2008, the data does not support any hypothesis or argument that stock markets would be volatile during US elections. I have checked the data for earlier years too, it does not give us sufficient proof.
However, this year could be different.
We used the VIX Index during the election year to find a proof whether our argument is true. VIX is an estimate of the forward looking volatility for the next 30 days. But since we are talking of past, we can calculate realized volatility from historical prices to check whether there is any change. The following are the realised volatility numbers.
Table showing realised volatility during the full year versus realised volatility during the US election period (from September to December of the election year)
Table showing volatilty during the year 2000 versus a few previous years
||Volatility for full year
||Volatility around election period
We cannot ascertain whether the recent volatilty is due to Covid-19 or due to US elections.
||Volatiltiy for some previous years
||Volatility for the year 2020 (data till 9th Oct 2020)
END OF MY NOTES