This is a follow-up to our previous article on the US Election’s impact on SPX implied volatilities. We want to look at how things have changed and also draw a comparison to FX markets, specifically EURUSD implied volatilities.
With elections, polling results can be notoriously poor predictors. Instead, to assess how things have changed, we look at the chances of each candidate winning, using the implied odds from a traditional betting market. See figure 1: As we can see from the chart, the chances of the Republicans winning has increased significantly.
Generally, markets don’t like uncertainty; this usually leads to increased implied volatility around the events. As the probability of an event increases, we generally see implied volatilities drop. With this in mind, we look at how the volatilities around the election event have changed.
We begin by considering how the SPX election event volatility has changed over the past few weeks. Again we use the approach we previously described in our article, measuring event volatility over the last few weeks. As expected the volatility has dropped, see figure 2.
In Clarion, our live portfolio management solution, we already model daily implied volatilities for FX options. Using Clarion, we are able to easily extract the precise daily volatility around the US Election. We consider EURUSD since the exchange-rate would clearly be impacted by US election risk. Volatilities are extracted from at-the-money straddles. As with SPX, we see a similar pattern of decreasing volatilities, see figure 3.
In conclusion, in both cases, the market is pricing-in more likelihood of a Republican win and this is reflected in decreasing volatilities up to the time of writing.
